UK real pay falls at record rate but labour market tightness eases only slightly
This morning’s UK data suggested that labour market tightness is easing only very gradually despite the contraction in GDP in Q2, but also that real incomes are falling sharply. The headline ILO unemployment rate edged up over the second quarter. But that increase of just 0.1ppt occurred at the start of Q2 and merely took the rate to 3.8%, in line with the level at the end of 2019 ahead of the pandemic. That slight rise in the jobless rate reflected a modest drop in the employment rate over the quarter, of 0.1ppt to be 1.0ppt (281k workers) below the pre-pandemic level. Meanwhile, the inactivity rate – one of the UK’s key structural weaknesses since the start of the pandemic – was unchanged over the same period, still some 1.2ppt (521k workers) above the pre-Covid level.

The softening of economic activity was also reflected in a modest drop in the total number of hours worked, which remained below the pre-pandemic level. But while the number of job vacancies in the three months to July also fell slightly for the first time almost two years to add to evidence that the labour market is turning, the decline was modest (a little less than 20k) and left the total (1.274mn) at an extremely high level and broadly in line with the total number of jobless workers. And the redundancy rate remained close to the record low.

In terms of pay, growth in average total labour earnings (including bonuses) slowed to 5.1%3M/Y in June, down 1.3ppts from the three months to May and almost 2ppts over the quarter. But that reflected volatility in bonus payments, excluding which regular pay growth picked up 0.3ppt over the month and 0.5ppt over the quarter to 4.7%3M/Y in June, a nine-month high and a rate likely to be too high for comfort at the BoE. Given high inflation, however, it remains far too low for comfort among households. Indeed, in real terms, total pay fell 2.5%3M/Y and regular pay was down a record 3.0%3M/Y. And with inflation set to rise sharply further over the autumn, real pay looks set to fall significantly further. So, in the absence of significant new fiscal support, household spending seems bound to fall towards year-end and beyond.

Momentum in Japanese services recovery fades at the end of Q2
While the acceleration in Japanese GDP growth in Q2 was led by increased spending on services as Covid restrictions were relaxed, today’s monthly figures suggested a softening in tertiary activity at the end of the quarter. Indeed, having risen by more than 1.0%M/M in each of the previous three months, tertiary activity fell back 0.2%M/M in June. Admittedly, this left activity in the sector up almost 2½%Q/Q. But it was also still more than 1½% below the pre-pandemic level and more than 6% lower than the pre-consumption tax hike peak in September 2019.

The weakness in June was led by a drop in medical services likely related to easing pandemic strains (-1.3%M/M) and real estate (-1.7%M/M). But with households’ budgets being squeezed by higher prices and still-low pay growth, and confidence having fallen to its lowest level since the start of 2021, retail trade (-0.9%M/M) and restaurant services (-6.9%M/M) fell for the first month in four, with the latter still almost one-fifth below the pre-pandemic level. In the absence of a marked increase in transport, electricity supply and finance activities, the drop in tertiary activity would have been ½ppt steeper. And sentiment indicators suggest a further deterioration in conditions in the sector at the start of Q3, with the headline services PMI down 3.7pts in July to 50.3, while the economy watchers survey saw its household related demand for services diffusion index plunge 16.8pts to a five-month low of 44.3.

German ZEW survey to suggest confidence remains extremely low
This morning will bring Germany’s ZEW investor sentiment survey for August, which seems bound to suggest that confidence remains very low as concerns about near-term recession, possible disruption to energy supply and freight transport on the Rhine, as well as higher interest rates, persists. Equity and bond market movements over the past month, however, might point to a modest improvement in the expectations balance from July’s 30-year low on hopes that global inflation pressures are close to the peak, although we expect the current conditions index to decline further to the lowest in more than a year on recession concerns. In addition, today’s euro area goods trade figures for June will provide some further guidance on the contribution to GDP growth from net trade in Q2.

US focus on IP and housing starts data today
In the US, today brings the release of July industrial production data, which are expected to report modest growth in manufacturing and energy (the latter boosted by above-average temperatures) to leave total IP up 0.3%M/M, albeit merely reversing the decline in June. Housing starts figures for July are also due. With sales of new homes weakening and inventories of unsold units accumulating, the number of new single-family starts is likely to have been trimmed further, while multi-family starts will likely report some payback for the stronger reading in June.