Japanese IP disappoints in February

Chris Scicluna
Emily Nicol

Chinese PMIs signal contraction at the end of Q1 as Omicron restrictions take toll
The official Chinese PMIs weakened more than expected in March as the government’s pandemic-related restrictions on activity – including local lockdowns in Shanghai, Shenzhen, Jilin and several other cities accounting in total for about 9% of national GDP – took their toll. In particular, the headline manufacturing PMI fell 0.7pt to 49.5, the first sub-50 reading since October. The output component similarly fell into contractionary territory (49.5), with a larger drop in new orders (down 1.9pts to 48.8) as external demand fell. And firms continued to face rising cost burdens, with the input price PMI up a further 6.1pts to 66.1, a five-month high, due not least to renewed pressures in global energy markets. Pandemic restrictions have inevitably hit services firms particularly hard in March, with the non-manufacturing PMI down 3.2pts to 48.4, the lowest since August and the third-weakest on the series. As such, the composite PMI declined 2.4pts to 48.8, the lowest since the onset of the pandemic, albeit still well above the trough (28.8). Over the first quarter as a whole, the composite PMI (50.3) was 1.4pts lower than the Q4 average and the weakest since Q120 (44.7), suggesting that, despite a stronger start to the year for economic activity, GDP growth remained subdued in Q1.

Japanese IP disappoints in February despite acceleration in autos production
Today’s Japanese industrial production data for February fell somewhat short of what were already relatively conservative expectations. In particular, output rose just 0.1%M/M following consecutive declines in December and January. This was in spite of a notable rebound in the transport sector, with production of autos up 10%M/M (which nevertheless left it some 16.5% below the pre-pandemic), with auto parts and equipment up 7½%M/M and aircraft parts up 46½%M/M. But there was a sizeable decline in the chemicals sector (9 ½%M/M) as output of components made from crude oil fell – e.g. output of synthetic detergent was down 14.6%M/M with plastics down 4.1%M/M. Admittedly, given the surge in overall production in November (7.0%M/M), the level of output in the first two months of Q1 was trending some 0.8% above the Q4 average. Nevertheless, output was barely higher than a year earlier and still some 3% lower than the pre-pandemic level. And while manufacturers were notably more upbeat about production plans this month and next – forecasting growth of 3.6%M/M and 9.6%M/M respectively – reflecting the lifting of domestic restrictions, the near-term outlook remains clouded by Russia’s invasion of Ukraine and the latest pandemic wave sweeping across China.

French inflation exceeds expectations, surpassing 5% despite government interventions
Just like yesterday’s figures from Germany and Spain, the flash estimate of French inflation in March exceeded expectations. On both the national CPI measure, and the EU-harmonised HICP measure, inflation jumped a hefty 0.9ppt, to 4.5%Y/Y and 5.1%Y/Y respectively. Thanks to the government’s interventions, not least the electricity price cap which INSEE estimates knocked about 1½ppts off inflation last month, French inflation might well have remained the lowest of all euro area member states. However, it’s still the highest since the mid-1980s. Perhaps inevitably, the pressures in March were led by energy (up almost 8ppts to 28.9%Y/Y not least due to higher prices of gasoline) and food (up 0.7ppt to 2.8%Y/Y). Services inflation was also a touch firmer (up 0.1ppt to 2.3%Y/Y, the highest since 2009). However, despite intense cost pressures, inflation of manufactured goods slowed 0.1ppt to 2.1%Y/Y, to suggest that core inflation was little changed and still close to the ECB’s 2% target. Flash inflation figures from Italy and Portugal will come later this morning ahead of tomorrow’s euro area numbers – the Italian HICP measure is expected to jump 1ppt to 7.2%Y/Y.

German retail sales up in February but on track for first quarter contraction; French spending on goods also well down on Q4; euro area labour market data to come
Having taken a big step down in December as the latest pandemic wave intensified, and been flat in January, German real retail sales rose a modest 0.3%M/M in February. That left sales volumes 4.4% above the pre-pandemic level two years earlier, and up 7.1%Y/Y from the weak base a year ago. But the average level of sales volumes in the first two months of Q1 was some 0.9% below the Q4 average. So, with consumer confidence having unsurprisingly taken a dive since Russia’s invasion of Ukraine, retail sales are on track for a non-negligible contraction in Q4. Within the detail, food sales were little changed (up 0.1%M/) in February but non-food sales were up 0.9%M/M.

As in Germany, French household spending on goods rose in February, but growth of 0.8%M/M failed to fully reverse the drop of 2.0%M/M in January. And that left it trending so far in Q1 some 1.4% below the Q4 average, again suggesting the likelihood of a drop this quarter. Of course, spending on services is likely to be well up on Q4 as pandemic-related restrictions on activity were eased.

Looking ahead, euro area unemployment data for February are due later this morning, with a further 0.1ppt drop in the headline rate, to a series low of 6.7%, expected. Germany’s labour market data for March reported an eleventh successive monthly drop in jobless claims, of 18k, leaving the claimant count rate unchanged at 5.0%. will offer some further insight. Separately, ECB Chief Economic Lane has just started a speech about monetary policy during the pandemic, while Vice President de Guindos will also speak publicly today.

UK GDP revised higher in Q4, but consumption and fixed investment revised lower
There was a surprise upwards revision to UK GDP in Q4, with growth now estimated to have been 0.3ppt stronger than previously thought at 1.3%Q/Q. So, despite modest downwards revisions to growth in Q2 and Q3, by 0.1ppt a piece, the level of output was revised higher to be just 0.1% below the Q419 peak. The upwards revision (on the expenditure side) was overwhelmingly driven by a smaller drag in inventories – now estimated to have subtracted 1.3ppts from growth compared with 2.2ppts previously. In contrast, private consumption growth was revised notably lower in Q4, by 0.7ppt to 0.5%Q/Q, reflecting a downwards revision to spending on transport, to leave it still 1% lower than the Q419 level (compared with the previously estimated shortfall of 0.4%). Fixed investment growth (1.1%Q/Q) was also roughly half what had been previously estimated, while government spending growth was lowered by 0.4ppt to 1.5%Q/Q. And while growth in exports and imports was much stronger than previously projected, the contribution from net trade was unchanged (1.7ppt).

In terms of the production side, there were upwards revisions to a range of services activity in Q4 – led by the healthcare sector – to leave total output in the sector now 0.9% above the pre-pandemic level. But while manufacturing production was also revised a touch higher, it remains 1.5% below pre-Covid levels, similar to the pandemic-related shortfall in construction activity.

Lloyds survey suggests deterioration in UK business sentiment but rising wage pressures
While monthly GDP data reported ongoing UK economic recovery at the start of the year, today’s Lloyds business barometer suggested a notable deterioration in sentiment in March. In particular, the headline index fell 11pts to 33, an eight-month low. While the monthly drop was the biggest since May 2020, it was still notably smaller than the 38pt drop that month, while the index was still above the long-run average (28). Perhaps unsurprisingly, the impact of the Ukraine war was more evident in manufacturing sentiment, with the respective index down 19pts to its lowest level since last summer. Retailers reported a similar drop in sentiment to a one-year low, with confidence among services and construction firms also slightly lower, although the latter were seemingly still more upbeat than at the start of the year. While hiring intentions fell back this month, nearly half of respondent firms still expect to increase headcount over the coming year, with firms still reporting ongoing pay pressures too. Against this backdrop, for the fifth consecutive month, over half of firms expect to increase prices in response to ongoing cost pressures (although the share was only slightly higher than in February).

UK house price pressures remain strong at end-Q1 with inflation at highest since 2004
Amid a shortage of supply and still historically low mortgage rates, UK house prices again rose more than expected at the end of Q1. Prices rose 1.1%M/M in March to push the annual rate up 1.7ppts to 14.3%Y/Y, the highest since 2004.

US personal income and spending numbers due
In the US, today will bring the latest monthly personal income, spending and the associated deflators for February. Daiwa America’s Mike Moran expects strong employment growth to feed through to higher income. But with the PCE deflator set to have risen notably further, spending might well have been more tepid last month (Mike expects spending growth of 0.4%M/M, with the core PCE deflator also up 0.4%M/M). Meanwhile, ahead of tomorrow’s payrolls numbers, today will bring the weekly jobless claims numbers and Challenger Job Cuts figures for February.

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