Japanese consumption falls back in July

Chris Scicluna

Japanese consumption slips back in July
Today the BoJ released its Consumption Activity Index for July, providing the first guide to how consumer spending has begun the current quarter following the slump of 8.2%Q/Q in Q2. It is important to note that the June reading was revised higher, largely on account of a much firmer assessment of spending on services. Indeed, the level of real spending – adjusted for (currently negligible) net tourist spending so as to be consistent with the national accounts measure – was 3.7% higher than estimated previously, albeit still down over 9%Y/Y. Off that improved base, real spending fell 2.4%M/M in July, with spending down somewhat across all categories. Nonetheless, spending in July was still 5.6% higher than the average recorded through Q2, suggesting that household consumption is on track to reverse around two-thirds of last quarter’s slump.

Coming days to be busy for Japanese data
The remainder of this week will be busy as far as data is concerned. Tomorrow will see the second release of national accounts data for Q2. Given the larger-than-expected decline in capex suggested by last week’s MoF corporate survey, our colleagues in Tokyo anticipate that the overall contraction in GDP will be revised to -8.0%Q/Q from -7.8%Q/Q previously. Also tomorrow we will receive household spending, labour income and current account data for July and, perhaps more importantly, bank lending data and the Economy Watchers Survey for August. At best, modest improvement might be expected in the latter. On Thursday most attention will centre on the machinery orders report for July, where the market appears to be expecting just a small rebound from the further large decline in orders that was recorded in June. On Friday the MoF will release its Business Outlook Survey for Q3, providing some guide as to what might be expected in the more widely followed BoJ Tankan survey early next month. Friday also brings the release of the PPI reported for August, which should continue to depict an annual decline brought about largely by the slump in the price of energy.

Chinese exports beat expectations, imports remain subdued
This week’s Chinese data flow got underway today with the release of external trade statistics for August. As was the case last month, exports slightly beat market expectations with values rising more than 9.5%Y/Y in dollar terms (11.6%Y/Y in yuan terms). This was up from growth of 7.2%Y/Y in July and the represented the best outcome since early 2019. Of particular note was a pickup in growth in exports to the US (20.0%Y/Y vs 12.5%Y/Y) previously), whereas growth in exports to Hong Kong (-3.0%Y/Y) and ASEAN countries (12.8%Y/Y) was weaker than last month. Of course, given the weakness seen earlier, this still left total exports down just over 2%YTD/Y for the first eight months of the year.

Reflecting the relative weakness still observed in domestic demand, as well as lower energy prices, imports remained very subdued in August, unexpectedly declining 2.1%Y/Y in USD terms (and 0.5%Y/Y in yuan terms). Of particular note, China’s imports from the US rose just 1.8%Y/Y – even slower than last month – so that China’s bilateral trade surplus rose to a 22-month high of $32.4bn. In other words, China’s purchases continue to fall well short of the commitment made as part of the phase one trade deal negotiated at the beginning of this year. China’s overall trade surplus narrowed only slightly to a still-large $58.9bn.

The other scheduled Chinese economic reports due this week are the CPI and PPI releases for August, due on Wednesday, which will doubtless continue to depict subdued pressure on inflation. The money and credit figures for August may make an appearance late in the week or over the weekend. Data aside, investors will continue to look for further clues regarding the government’s economic priorities ahead of next month’s scheduled 5th plenary session of the 19th CPC Central Committee.

German production makes only modest advance in July
This morning’s German industrial production data for July were softer than expected, with growth in overall IP of 1.2%M/M contrasting with expectations of growth of around 4%. While growth in June was revised up 0.4ppt to 9.3%M/M, that left production down 10.0%Y/Y and 10.8% below February’s pre-lockdown level, albeit almost 10% above the average level in Q2. Manufacturing production rose 2.8%M/M – to be still down almost 12% from February byt up a little more than 13% from Q2 – with output of intermediate goods up 4.0%M/M, consumer goods up 1.8%M/M and capital goods up 2.1%M/M. Auto production was up 6.9%M/M, leaving it still down more than 15% from the pre-lockdown level.

Beyond the manufacturing sector, this morning’s data were weak. Construction output fell 4.3%M/M to be down about 6½% from February’s level. And energy production fell 0.6%M/M to be down more than 8½% from the pre-lockdown level. While survey indicators, such as the ifo indices and PMIs, point to ongoing recovery in August and probably ahead in manufacturing, not least in the auto sector, they also point to continued weakness in construction.

ECB forecasts in focus as Governing Councils set to meet
The main event in the coming week will be the conclusion of the ECB’s monetary policy meeting on Thursday. Coming just a month after the ECB increased its PEPP asset purchase envelope by €600bn to €1.35trn, the last policy meeting in July was inevitably something of a non-event with little to report on the policy front. While differences of view among some Governing Council members about the nature of the €1.35tn envelope were aired following the meeting, the account subsequently revealed that the main presumption was that the amount would eventually have to be purchased in full. But Governing Council members also noted that they would be in a better position to judge the appropriateness of the policy stance at the forthcoming meeting, when the ECB’s updated economic forecasts will be available. And those forecasts will indeed be a key focus on Thursday.

Recent comments from senior ECB officials suggest that the amendments to the GDP projections are likely to be minimal. But data suggest that, if anything, the ECB’s previous central projection of a contraction of 8.7% in 2020 might have been a little too downbeat. Moreover, the policymakers might take comfort from the agreement of EU leaders in July to allow the Commission to borrow up to €750bn over the coming few years to fund a mix of grants and loans to member states to support economic recovery. They are also likely to be encouraged by yesterday’s announcement by the French government that it plans a new fiscal stimulus programme, worth €100bn (more than 4% of GDP) to be spread over two years, about 40% of which will be funded by EU grants. At the same time, signs of a levelling off in economic activity over recent weeks, as well as continued uncertainty surrounding the path of the pandemic and new headwinds such as recent euro appreciation should limit any upwards revisions to the GDP forecasts for 2021 (5.2%) and 2022 (3.3%).

In terms of inflation, the forecasts will need to take account of this week’s flash estimates for August, which revealed a drop in the headline CPI rate into negative territory for the first time since 2016 and a record low core rate, thus underscoring the net disinflationary impact of the pandemic. And the euro’s recent appreciation will mean that the exchange rate assumption used in the projections will be more than 4% stronger than that used previously, a revision that should mechanistically weigh on the forecast path of inflation up to two years ahead – as was seemingly acknowledged by ECB Chief Economist Philip Lane earlier this week. So, we expect to see modest downside revisions made to the inflation projections, which previously suggested that core inflation would still be just 0.9%Y/Y in 2022. Maintenance of that forecast, or indeed a downwards revision, would support the case for additional stimulus in due course. For the time being, however, Governing Council members will see no need to adjust policy just yet, thus maintaining maximum flexibility in the PEPP purchases. And it will also retain the current forward guidance, which would leave the door open to further easing, such as via an increase in the PEPP envelope, in due course.

In terms of economic releases, tomorrow will bring revised euro area GDP figures for Q2, which are expected to confirm that output contracted at a record pace last quarter, close to the previous estimate of 12.1%Q/Q, to leave output more than 15% below its pre-pandemic peak. The expenditure breakdown – due to be released for the first time – will report steep declines in private consumption, investment and trade alike. Tomorrow will also bring revised employment data for Q2, which are expected to confirm the initial estimate of a drop of more than 4.5mn to 155.9mn, the lowest level for three years. This release will also bring the first official figures from member states, which, despite various government job support schemes, are likely to confirm widespread weakness.

In terms of national data from the member states, German and French trade figures for July will be published tomorrow, while Wednesday will see the Bank of France (BoF) publish it monthly business conditions indices and monthly economic update for August – the previous release saw the BoF forecast a GDP shortfall of around 7% in August from the pre-pandemic level, similar to that estimated in July. IP reports for July from France and Italy will come on Thursday and from Spain on Friday, with final German and Spanish CPI figures for August also to be published on Friday.

UK Government risks derailing EU FTA talks with legislative stunt
The main focus in the UK in the coming week will be Brexit, with FT reports suggesting that the Government will publish new legislation on Wednesday (the UK internal market bill) that will be wholly incompatible with the Withdrawal Agreement – particularly the so-called Northern Ireland protocol – which was signed by Boris Johnson in January and entered into force only on 1 February this year. While the Government will present the legislation as contingency planning for the event that no FTA is reached with the EU by mid-October, it risks derailing those very negotiations. And its apparent willingness to breach an international treaty would arguably have lasting implications for the UK’s reputation, among other things jeopardising its ability to sign future trade agreements with third countries too.

Data-wise, Friday’s release of monthly GDP figures for July, which will be accompanied by sectoral output and trade numbers for the same month, will be most notable. With lockdown measures across the hospitality sector having been relaxed further that month, and surveys signaling ongoing improvements in business conditions, we would expect to see another solid increase in activity at the start of Q3, with expectations for a rise of about 6%M/M. However, this would still leave output down more than 12% compared with the pre-pandemic level in February and down more than 7½%3M/3M. Output in both services and manufacturing is expected to have continued to recover. Ahead of this release, the BRC’s retail sales monitor for August is due tomorrow, while the RICS residential market survey for the same month is due on Thursday.

Australian job ads post modest rise
The only notable economic report released in Australia today was the ANZ job ads index, which rose 1.6%M/M in August. Unfortunately, while this represented a 4th consecutive monthly gain, the index was still down a whopping 30%Y/Y – largely reflecting the more than halving of job advertising that was recorded back in April.

In other Australian news, the state of Victoria recorded just 61 new cases of coronavirus on Sunday, falling further to a 2-month low of 41 cases today. But yesterday state Premier Daniel Andrews announced that there would only be a very slight easing of lockdown restrictions over the next three weeks. However, Andrews also outlined a roadmap for more significant gradual easing steps from 28 September through to 23 November, contingent on case numbers declining further to targeted levels. If today’s case numbers are maintained, the steps on 28 September would include the reopening of childcare and classroom learning for young children and an increase in the maximum public gathering size to allow up to five people from two households to meet.

Looking ahead, the main Australian economic data focus this week will likely be on the latest gauges of economic sentiment, starting tomorrow with the NAB Business Survey for August and continuing Wednesday with the Westpac Consumer Confidence Index for September. Tomorrow the ABS will release the latest instalment of its new weekly measure of payrolls and wages, which aims to use tax data to provide a high frequency indicator of the labour market impact of the coronavirus pandemic. On Wednesday the ABS will release home lending data for July, while the Melbourne Institute’s survey of inflation expectations completes this week’s diary on Thursday.

Inflation to provide the data focus from the US
Most US economic interest this week will be focused on the latest developments in inflation, beginning with the August PPI report on Thursday and continuing with the August CPI report on Friday. Market polls suggest that analysts expect core CPI to rise 0.2%M/M to leave the annual rate steady at last month’s reading of 1.6%Y/Y. Headline inflation is expected to rise a touch more on the month, up 0.3%M/M, but will remain about 0.4ppt lower than the core rate in year-on-year terms due to weaker energy prices. The only other notable economic reports this week are tomorrow’s NFIB small business survey for August, Wednesday’s JOLTS labour market report for July and Thursday’s weekly jobless claims report and whole trade survey for July. Given the proximity of the next FOMC meeting (16 September) there is no Fedspeak scheduled this week. Needless to say, any political news will continue to be followed closely given the looming US elections.

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