Japanese household spending declines in January, with further weakness to come
At face value, today’s Japanese household spending numbers suggested an improvement at the start of the year, with the headline figure reporting an acceleration in annual growth to 6.9%Y/Y, double the Bloomberg consensus forecast. But the strength in this number principally reflected the low base a year ago. The monthly profile was far less encouraging, albeit not unexpected given the latest pandemic wave and associated restrictions, with total spending down 1.2%M/M in January. And this figure was flattered by higher expenditure on the more volatile items – i.e. housing and vehicles. Indeed, when excluding such items, core spending fell for the third consecutive month and by 2.8%M/M to be more than 3% lower than the Q4 average. Moreover, with the quasi-sate of emergency restrictions still in place, consumer confidence at a five-month low with households’ willingness to buy durable goods the weakest is a year, and household budgets being squeezed by rising prices, we expect private consumption to remain subdued over coming months.

Japanese business conditions deteriorate in Q1, with modest recovery expected over near term
The government’s quarterly business sentiment survey for Q1, also published today, suggested a marked deterioration in conditions at the start of the year. The headline business sentiment diffusion index (DI) fell 17.1pts to -7.5, the lowest reading since the onset of the pandemic, with similar weakness in the manufacturing and non-manufacturing sectors alike. And the share of businesses citing a decline in domestic economic conditions was more striking – i.e. the relevant DI fell 38pts over the quarter to -16.3. As is often the case, SMEs considered conditions to be even tougher at the start of the year. Admittedly, the survey indices remain well above the troughs seen at the start of the pandemic – e.g. the headline sentiment index stood at -47.6 in Q220 (compared with -7.5 in Q122). And the survey pointed to a modest improvement in both overall and domestic conditions in the quarters ahead, although the headline indices were still forecast to remain some way below the Q419 level even before the Russian invasion of Ukraine (survey was conducted 15 February).       

UK GDP beats expectations to maintain steady growth trend at start of 2022
Having dipped 0.2%M/M in December as the omicron variant took hold, UK GDP rebounded a larger-than-expected 0.8%M/M in January. That took GDP 0.8% above the pre-Covid level in February 2020. Looking through the month-to-month volatility caused by the ebb and flow of the pandemic, it suggested that the UK’s growth trend remained broadly steady, with the 3M/3M growth rate of 1.1% little different to that of the prior four months.

UK growth was broad-based in January. Despite a negative contribution from the Covid-related policy response including vaccinations, services activity rose 0.8%M/M, led by consumer-facing activity such as hospitality and retail as households looked to get back to normal in light of the diminished threat from omicron. That took the level of services activity 1.3% above the pre-Covid level, although consumer-facing services were still down 6.8% against the same benchmark illustrating scope for further catch-up over coming months. Construction rose 1.1%M/M to be a similar 1.4% above the level in February 2020. But while production rose 0.7%M/M, it was still 2.0% below the pre-Covid level, restrained by supply bottlenecks in manufacturing, not least in the autos sector.

Looking ahead, February looks to have seen continued firm growth as the impact of the pandemic continued to fade. However, the erosion of real disposable income from record petrol prices, the more-than-50% increase in household energy bills next month, more intense inflationary pressures affecting food and other goods, as well as rising national insurance contributions and interest rates, seems bound to take a toll from Q2 on. Indeed, consumer confidence weakened markedly in February and seems likely to fall to contractionary levels this month. So, were it not for scope for ongoing normalisation in consumer-facing services, as well as the buffer of savings accumulated by some households throughout the pandemic, we would be forecasting recession.       

Later today, the results of the latest quarterly BoE/Kantar Inflation Attitudes Survey will be watched to gauge the extent of rising consumer price expectations for the coming year and – arguably most important for the MPC –  the medium term.

After ECB policy announcements suggested the hawks have the upper hand for now, EU leaders fail to agree how to reduce dependence on Russian energy; data-wise, the rise in German inflation in February was confirmed this morning

Yesterday’s ECB policy announcements saw the hawks appear to gain the upper hand for the time being, with a slightly sharper pace of reduction in net asset purchases agreed for the coming quarter, and the door nudged open to a possible end to net purchases in Q3 and a rate hike thereafter. However, the doves ensured that those forthcoming decisions affecting policy in the second half of the year will be data-dependent, and gained a recognition that, first and foremost, the ECB should respond flexibly as events in Ukraine unfold and resonate more widely in the euro area economy. Certainly, we found the ECB’s updated baseline forecasts too conservative with respect to the expected peak in inflation over the near term and too upbeat from the perspective of GDP growth. And a marked deterioration in economic activity that weighed on the labour market would have negative consequences for the medium-term inflation outlook, suggesting that an end to QE in Q3 might be premature. Mindful of the uncertainties, Bank of France Governor Villeroy this morning stated that the ECB was ready to do more– presumably additional net purchases – if required to combat market fragmentation.

There were no surprises from the final estimates of German consumer price inflation in February, which aligned with the preliminary figures. So, the national CPI measure rose 0.2ppt to 5.1%Y/Y while the EU-harmonised HICP measure rose a steeper 0.4ppt to 5.5%Y/Y. Within the detail, the increase was due largely to energy prices, which on the national measure rose more than 2ppts to new series high of 22.5%Y/Y. Food inflation was also firmer, up 0.3ppt to 5.3%Y/Y. So, excluding food and energy, the national core measure of CPI edged up just 0.1ppt to 3.0%Y/Y. Of course, both headline and core inflation look set to rise significantly further over the near term as cost pressures – particularly regards energy – continue to feed through.

With yesterday evening EU summit having brought no breakthrough consensus on how to reduce the region’s dependency on Russian hydrocarbons, or whether to fund new initiatives in energy independence and defence via common bond issuance. The leaders will continue their discussions today with a focus on the region’s growth and investment model with ECB President Lagarde. 

US week for data ends with focus on (downbeat) consumer confidence
The US dataflow ends with the preliminary University of Michigan consumer confidence survey results for March. Given rising food and fuel prices, as well as stock market turbulence, consumer sentiment looks set to drop for the seventh month out of the past eight and well below the Covid recession low from April 2020.