Japanese household spending steady in December, but core spending down
Like yesterday’s BoJ consumption activity data, today’s MIC household expenditure survey suggested that spending momentum weakened towards the end of last year, with total household expenditure up just 0.1%M/M in December. Nevertheless, this still left total spending up 4.6%Q/Q in Q4, suggesting a strong contribution from household consumption to GDP growth last quarter. But while household spending was just above the pre-pandemic level in December, it remained roughly 6½% lower than the pre-consumption tax hike peak in September 2019. And in December, spending was strongest on non-core items – e.g. housing (26%M/M), transport (5.1%M/M) and education (16.0%M/M). Indeed, core spending fell for the second successive month in December, and by 1.0%M/M, nevertheless still leaving it almost 4% higher over the fourth quarter as a whole.

Wages decline on the back of weaker bonus payments and subdued regular wage growth
Today’s other data suggested that consumption will remain subdued for the time being too. Certainly, the latest labour earnings figures disappointed, with total wage growth unexpectedly declining 0.2%Y/Y, the first negative reading since February 2021. Admittedly, this reflected weak winter bonus payments, which were down 0.9%Y/Y despite the low base a year ago. But regular wage growth remained very subdued (0.2%Y/Y). So it was only thanks to a pickup in overtime earnings (4.8%Y/Y) that the overall decline wasn’t steeper. And we would expect overtime hours to have slipped back at the start of the year amid the surge in coronavirus cases and renewed restrictions. Given also the recent rise in inflation, real wages fell a much steeper 2.2%Y/Y in December, the most since May 2020 and the second-steepest decline for almost six years.

Economy watchers index declines at steepest pace since 2011
But perhaps most striking today was the latest economy watchers survey, which reported the largest monthly decline (-19.6pts) in the headline economic diffusion index since the 2011 Great East Japan quake and tsunami. Given the strength reported over recent months, this merely left the index at a five-month low (37.5), nevertheless a level consistent with contraction. While the weakness was broad based, the most sizeable declines related to household demand, with the respective diffusion index (DI) down 24pts to 34.5, with demand for retail, food and drink and services slumping amid tighter pandemic restrictions. But corporate-related demand also fell back, with the respective DI (43.8) at a four-month low. And while economy watchers signalled that they expected the economic recovery to resume in due course, they remained concerned about the latest pandemic wave and higher cost burdens.

UK spending data provide mixed picture as real disposable incomes are steadily eroded
Today’s snapshots of spending at the start of the year in the UK were a mixed bag. At face value, the BRC’s retail sales survey looked strong, with the measure of total sales up 11.9%Y/Y with like-for-like sales up 8.1%Y/Y. But that figure was flattered by the weakness of sales during the lockdown a year earlier when non-essential stores were shut, as well as higher prices. While food sales were reportedly muted as opportunities for eating out increased, strength in nominal sales was reported in purchases of items for the home, including appliances, electronics and furniture – all categories currently experiencing high rates of inflation. Overall, therefore, we suspect that the official measure of retail sales in January will show that the 3.6%M/M drop in December was by no means fully reversed last month.

Indeed, Barclaycard reported that spending on its cards rose 7.4% in January compared to the same month of 2020 just ahead of the pandemic, representing the softest such rise in nine months. The slowdown partly reflected lower spending on fuel and public transport due to increased working from home, an effect likely to reverse in the current month. But spending on tourism and hospitality was also much weaker. And the ongoing significant erosion of real disposable incomes – due to higher inflation, taxes and interest rates – seems bound to weigh on discretionary spending over coming quarters.

US trade report to confirm record goods deficit
In the US, today will bring December’s full trade report, which will confirm a notable widening in the goods trade deficit to a record high, while services trade is likely to have been impacted by the latest pandemic wave. As such, the overall trade deficit was expected to have widened from $80.2bn to $83.0bn, a fresh series high. Meanwhile, the NFIB small business survey for January is expected to have edged slightly lower amid the latest pandemic wave to an eleven-month low and remaining well below the pre-pandemic level.