French GDP rose above the pre-pandemic level

Chris Scicluna
Emily Nicol

Tokyo CPI fell back due to base effects from past government policy incentives
There were no major surprises from today’s advance CPI report for the Tokyo region, which confirmed an easing in inflation at the start of the year principally due to base effects associated with government policies. Indeed, prices actually rose on the month in January (+0.3%) by the most since September. But given that prices had risen by the most in any January on the series last year (+0.6%M/M), this resulted in annual inflation declining 0.3ppt to 0.5%Y/Y. When excluding fresh foods, the BoJ’s forecast measure of core CPI similarly fell 0.3ppt to 0.2%Y/Y. And when also excluding energy, core CPI fell 0.4ppt to a still-sharply negative -0.7%Y/Y.

Within the detail, energy inflation jumped a further 3ppts to 19.9%Y/Y in January, the highest rate for more than 40 years, with the annual increase in electricity prices up 3ppts to 19.3%Y/Y and gas prices by 4.6ppts to 20.1%Y/Y. But this was more than offset by a sharp moderation in hotel charges – by 43ppts to just 0.6%Y/Y – as base effects from the government’s travel subsidy fell out of the calculation. A drop in fire insurance contributions also knocked a further 0.1ppt off headline inflation too. While these downwards pressures should prove temporary, the surge in coronavirus cases across Japan further increases uncertainty about the pandemic impact on near-term inflation, with services prices likely to remain subdued due to tightened restrictions. Of course, the annual rate of services inflation will be given a notable boost in April due to base effects from last year’s cut in mobile phone charges.

Meanwhile, the BoJ’s alternative measures of national core inflation, published earlier this week and which are less impacted by extreme relative price shifts such as the steep decline in mobile phone charges and base effects from the government’s travel subsidies, suggested some tentative signs of increasing price pressures at the end of last year. In particular, the 10% trimmed mean CPI rose 0.1ppt to 0.9%Y/Y in December, the highest since July 2014. Admittedly this remains well below the equivalent reading in the euro area (3.9%Y/Y) and the 16% trimmed mean in the US (4.8%Y/Y), but is nevertheless 1.2ppts higher than April’s trough. And with almost 60% of items in the basket with rising prices matching the share seen before the pandemic, as and when these temporary distortions related to the mobile phone charges and travel subsidies fall out of the calculation, core inflation should rise again. Indeed, our colleagues in Tokyo expect national core CPI (excluding fresh foods) to jump 1ppt in April to 1.5%Y/Y.

French GDP growth moderates close to expectations in Q4 as activity moves further above the pre-pandemic level
Ahead of the equivalent German and Spanish data due later this morning, the figures for French GDP in Q4 broadly aligned with expectations. In particular, GDP growth slowed 2.4ppts from Q3, but remained respectable at 0.7%Q/Q despite ongoing restraints from supply bottlenecks and the emergence of a new wave of coronavirus. In light of some favourable prior revisions, GDP last quarter rose 0.9% above the pre-pandemic level of Q419. French growth was led by domestic demand, with household consumption up 0.4%Q/Q and fixed investment up a similar 0.5%Q/Q. And inventory accumulation added 0.4ppt to growth have subtracted 0.7ppt in Q3. In contrast, with imports (up 3.6%Q/Q) accelerating fasted than exports (up3.2%Q/Q), net trade subtracted 0.2ppt from GDP growth having contributed positively by the same amount in the prior quarter. Overall, the growth in the final quarter meant the French GDP in 2021 rose 7.0%Y/Y having dropped 8.0%Y/Y in 2020.

German data to confirm contraction in Q4 while Spain grew vigorously once again
In contrast to the expansion in France last quarter, German GDP probably contracted up to ½%Q/Q in Q4 following growth of 1.7%Q/Q in Q3. But Spain probably chalked up the strongest growth of the larger euro area member states, rising more than 1.0%Q/Q in Q4 after growth of 2.6%Q/Q the prior quarter. We expect Monday’s initial estimate for the euro area as a whole to report growth of 0.3%Q/Q, marking a significant deceleration from growth of 2.2%Q/Q in Q3.

Commission survey to flag weakening in services, with inflation expectations to be watched
Beyond the GDP data, the European Commission’s detailed economic survey results are expected to align with Monday’s preliminary PMIs and suggest a weakening in services activity at the start of the year. The headline services index is expected to fall to a nine-month low of 9.6. But reflecting a modest easing in supply constraints, expectations are for a modest improvement in manufacturing conditions, with the respective index edging up to a series-high of 15.0. The survey’s various inflation expectations indices will also be watched for hints of an easing of supply-side pressures.

In terms of politics, today will bring a fifth round of voting in the Italian Presidential election. After the first three votes proved inconsequential, yesterday’s fourth round – in which a mere simple majority of votes was required to gain the Presidency – similarly failed as the main parties chose not to back any candidate. Given the lack of traction for him so far, expectations are now that Mario Draghi will remain as Prime Minister rather than become President, an outcome with which BTP investors might take some comfort. But so far, the identity of an alternative mutually acceptable compromise for the Presidency remains elusive.

With no UK data, focus remains firmly on politics
It is set to be a quiet end to the week on the UK economic data front, with no key releases scheduled tomorrow. The focus therefore will remain on politics, as Prime Minister Johnson clings to power ahead of the publication of the highly anticipated report by senior civil servant Sue Gray into his ‘party-gate’ scandal, into which the Metropolitan Police is also now conducting an inquiry. Reports suggest that the Gray report might be unlikely to be published before Monday, although in truth it could well come any time either before or beyond that day. Regardless, once it is published we would strongly expect Johnson to face a vote of no confidence from his MPs. Whether or not he survives might be determined principally by the detail of the report’s findings.

US data releases likely to confirm higher income, but lower spending in December
There are a number of notable US releases today, including the employment cost index for Q4. Given the tightness in the labour market and heightened competition for workers, this is likely to report a notable increase in wage and cost benefit costs in Q4. And this seems likely to be confirmed in the monthly personal income numbers for December too. This notwithstanding, and against the backdrop of higher prices – which will be illustrated by the PCE deflators in the today’s release – the monthly personal spending figures are likely to have weakened at the end of year, driven by a decline in new vehicle sales and reduced retail activity amid the emergence of Omicron.

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