Japan's manufacturing PMI signals strongest output growth since 2014

Chris Scicluna
Emily Nicol

Japan sees a big jump in employment before the latest pandemic wave
Consistent with solid economic expansion in the final quarter of last year, today’s labour market report suggested a marked improvement in employment conditions at the end of last year too. In particular, the total number of people employed rose for the first time since July and by a sizeable 490k in December to 66.73mn. And with the labour force having risen by smaller (but still substantial) 430k, the unemployment rate fell 0.1ppt to 2.7%, 0.4ppt below the pandemic peak, but still 0.5ppt above the pre-pandemic level. Indeed, despite the jump in employment last month, it still remained some 100k less than a year earlier and 840k lower than the pre-pandemic peak. This in part reflected the still low level of non-regular employees compared to before the pandemic – indeed, despite rising for the third consecutive month in December due to increased demand from the retail and hospitality sectors, the number of non-regular employees remained more than 600k below the pre-pandemic level. And today’s report suggested a further modest drop in regular employment for the fifth consecutive month.

Other detail of the report suggested a tightening of conditions in the labour market. For example, the job-to-applicant ratio edged higher to 1.16x, admittedly still notably weaker than the pre-pandemic ratio (1.45x), but nevertheless reflecting a sixth consecutive month of higher job offers. However, given the surge in coronavirus cases since the start of the year and tighter restrictions across much of Japan, we would expect to see a fall in employment at the start of the year, with non-regular employment in the consumer-facing services sectors likely to have been hardest hit.

Japanese manufacturing PMI signals strongest output growth since 2014
Despite the latest pandemic wave, the final Japanese manufacturing PMI survey offered an upbeat assessment of conditions in the sector at the start of the year, signaling an even stronger recovery in output and orders than initially estimated. In particular, the survey’s output component was upwardly revised to 54.9, an increase of 1.6pts from December and the highest reading since April 2014. And there was a further pickup in the new orders index (to 54.5, a nine-month high) reflecting stronger demand, both domestically and overseas alike. Against this backdrop, the survey’s employment index implied the strongest jobs growth in the sector for almost four years. But while delivery times lengthened by the least in four months, manufacturers boosted holdings of raw materials at the second-fastest rate in the survey history. And they also continued to attribute sustained supply chain pressures to the surge in input costs – indeed, the respective PMI (72.0) stood at its second-highest level since 2008. And there were signs that firms were starting to pass on these increasing costs to consumers, with the output price PMI jumping 3.2pts to 59.1 in January the highest since 2008.


Despite improved manufacturing conditions at the start of the year, as well as the solid pickup in car production last quarter (+20%Q/Q), today’s Japanese new car registrations numbers were disappointing. In particular, sales were the lowest for any January since 2011 and were 12.5% lower than a year ago.


French inflation beats expectations following yesterday's upside surprises in Germany and Spain

Following yesterday’s significant upside surprises to the January flash inflation estimates for Germany, Spain and Portugal, today’s equivalent French data similarly beat expectations. In particular, on the EU-harmonised HICP measure, French inflation dropped just 0.1ppt to 3.3%Y/Y, contrasting with the drop of 0.4ppt on the median forecast on the Bloomberg survey. And the national CPI measure rose 0.1ppt to 2.9%Y/Y, the highest since 2008. As elsewhere, energy prices again provided additional impetus, rising more than 2ppts to 19.7%Y/Y on the national measure due to higher petrol prices. And food inflation edged up 0.1ppt to 1.5%Y/Y. But while services inflation rose 0.2ppt to 2.0%Y/Y, inflation of manufactured items fell 0.6ppt to 1.2%Y/Y. While that left core inflation on the national measure down 0.1ppt at a still-moderate 1.5%Y/Y, the weakness of goods prices reflected the timing of the winter sales and a rebound might be expected in February. Based on the data released so far, we now anticipate a drop of 0.3ppt in tomorrow’s euro area inflation estimate to 4.7%Y/Y (vs the current BBG consensus of 4.4%Y/Y). Core inflation should also decline from December’s rate of 2.6%Y/Y but should remain firmly above 2.0%Y/Y.


German retail sales whacked by latest wave of coronavirus in December

German retail sales plunged at the end of last year as the latest wave of pandemic and associated restrictions saw shoppers stay at home. According to this morning’s preliminary figures, retail turnover fell in December by 5.5%M/M in real terms, the most since April. Sales at all types of stores were hit while online shopping fell too, suggesting that the pandemic restrictions were only part of the story. Real sales were still unchanged from a year earlier and 0.7% above the pre-pandemic level. However, despite growth in October and November, they also fell 0.8%Q/Q in Q4, highlighting the dominant contribution of weak private consumption to the 0.7%Q/Q drop in GDP last quarter. Despite strong inflation, the drop in nominal retail sales was also marked, down 4.9%M/M to be up just 0.1%Q/Q in Q4. We caution that these provisional data are frequently revised significantly. However, given the magnitude of the drop in December, it seems inconceivable that any revisions will alter the picture of marked weakness at the end of the year. And with a range of restrictions in place and hospitalisations moving in the wrong direction, sales have likely remained subdued at the start of 2022.


Euro area labour market data, final manufacturing PMIs, and initial car registrations data to come

Despite the confirmation yesterday that the euro area’s economic recovery slowed markedly in Q4, today’s labour market data are expected to report a further decline in euro area unemployment in December. German data will give an update on labour market conditions at the start of the year too. Meanwhile, this morning will also bring the final manufacturing PMI for January. The flash surveys suggested a further improvement in conditions in the sector at the start of the year, with the output PMI rising 2pts to a five-month high of 55.8 with the detail suggesting an easing of supply bottlenecks. This principally reflected a leap in the respective German output PMI, by 6pts to a five-month high of 58.4. In contrast, the French manufacturing PMI suggested only minimal growth in the sector (50.8). And today’s release will give the a more detailed breakdown on manufacturing conditions in other member states, including Italy and Spain.


Despite an improvement in production conditions, January new car registrations numbers from France, Italy and Spain are likely to suggest ongoing weak sales at the start of the year. Indeed, the French figures, released a short time ago, suggested that the number of units sold at the start of this year (103k) was the lowest for any January since 1975 and 18.6% lower than a year ago and still more than one third lower than in January 2019.


UK house price inflation up again, bank lending data to show subdued demand for consumer credit

In the UK, the first house price data for January indicated an acceleration at the start of the year. In particular, the Nationwide house price index rose 0.8%M/M to take the annual rate up a stronger-than-expected 0.8ppt to a seven-month high of 11.2%Y/Y, from 10.4%Y/Y in December, as a tight supply-demand balance offset concerns about Omicron, rising inflation and falling real incomes.


This morning’s data will provide an update on household lending in December. Demand for consumer credit is likely to have weakened as the rise in coronavirus cases and reintroduction of certain pandemic restrictions limited consumption of services while retail sales fell sharply at the end of the year. Net consumer credit is forecast at £0.4bn in December, compared with £1.2bn in November. Meanwhile, we would expect another solid month of growth in mortgage lending, while the Nationwide house price index in January reported the second-strongest annual house price growth (11.2%Y/Y) since mid-2014. Like in the euro area, this morning also brings final manufacturing PMI data, which are expected to align with the flash survey data and suggest that output rose further at the start of the year amid a limited easing in supply constraints.


US manufacturing ISM survey of note today; construction spending and car sales data also due

Today brings several releases of note, including the latest manufacturing ISM survey. Following the decline in the flash PMIs, the headline ISM is expected to have slipped back in January while remaining at a still-healthy level of 58 suggestive of ongoing recovery. The latest construction spending numbers are expected to report ongoing steady growth at the end of last year, supported by a recent increase in housing starts, while business activity is also expected to have drifted higher and government activity bounced back after weakness in November. Finally, despite the disruption from the latest pandemic wave, January vehicle sales numbers are expected to report a modest pickup after weakening late last year.

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