German IP down only slightly at the start of Q3, as construction and energy offsets fall in factory output
Yesterday’s weak factory orders and turnover data strongly pointed to a drop in German manufacturing output in July. And this morning’s figures duly confirmed a decline of 1.0%M/M, the first fall since March, to be down 1.4%Y/Y and 6.6% below the pre-pandemic level in February 2020. The sources of weakness in factory output at the start of Q3 were broad-based, as firms continued to struggle in the face of supply-chain disruption and the fall-out from the war in Ukraine. Capital goods output fell 0.8%M/M as production of machinery dropped 1.5%M/M and motor vehicles fell 4.6%M/M to be still more than 20% below the pre-pandemic level. Output of intermediate items fell 0.6%M/M with consumer goods down 2.4%M/M weighed by a drop of 3.0%M/M in non-durable items (including processed food). Most notably perhaps, production in energy-intensive subsectors dropped 1.9%M/M to be down 6.9% from February when the shock of Russia’s invasion of Ukraine triggered efforts by firms to reduce dependence on natural gas.

However, the decline in overall German industrial production in July was only a modest 0.3%M/M, following upwardly revised growth of 0.8%M/M the prior month, as growth in construction for the first time since February (1.4%M/M) and a weather-related pickup in energy output (2.8%M/M) offered support. Nevertheless, German IP was still just 0.2% above the Q2 average. And given recent surveys and deteriorating fundamentals, we strongly expect it to decline over Q3 as a whole and Q4 too.

Japan’s consumption activity slips back in July as Covid cases rise
Consistent with yesterday’s weaker household spending numbers, the BoJ’s consumption activity index – which arguably provides the best timely guide to the national accounts measure of household consumption – fell at the start of Q3 for the first time in five months as the rise in new Covid-19 infections weighed on services. Indeed, according to the BoJ’s estimates, total consumption fell 0.5%M/M in July, with spending on services down 0.8%M/M having failed to rise in June too. Consumption of durable goods also fell sharply in July (-4.1%M/M) reversing the jump at the end of Q2, while spending on non-durable items merely reversed the 0.6%M/M previously. Overall, the headline consumption activity index was 0.3% lower than the Q3 average. But with consumer confidence and households’ willingness to spend on durable items at historically low levels, real disposable income falling sharply and prices trending higher, we suspect that the drop in household consumption will continue as the quarter progresses.

China’s trade surplus narrows as export growth slowed sharply and imports weighed by tighter restrictions and sluggish domestic demand
China’s trade performance disappointed in August as a rise in Covid cases and restrictions weighed on domestic demand, while lower prices of commodities and oil also restrained import values but the global economic slowdown weighed on exports. In particular, exports rose a smaller-than-expected 7.1%Y/Y last month, the softest pace since April but were also likely impacted to some extent by a high base a year ago. There was also a first decline in shipments to the US (-3.8%Y/Y) since May 2020, while export growth also slowed sharply to the EU (down 12ppts to 11.1%Y/Y), Japan (down 11ppts to 7.7%Y/Y) and South Korea (down 10½ppts to 4.8%Y/Y). Meanwhile, imports were up just 0.3%Y/Y, the second-softest growth for two years, with Covid restrictions, heatwaves and sluggish spending weighing on demand. Overall, the trade surplus narrowed from July’s series high by a larger-than-expected $22bn to a nevertheless still-substantial $79.4bn, which was about 25% bigger than the average in the first half of the year.

Euro area updated GDP and jobs growth figures for Q2 due
Looking ahead, this morning will bring updated euro area Q2 GDP growth numbers, which will include an official expenditure breakdown for the first time. These are expected to confirm that the economy expanded 0.6%Q/Q last quarter, underpinned by increased opportunities to spend on services. Employment numbers for Q2 will confirm a moderation in job growth to 0.3%Q/Q, the softest pace in five quarters and hence consistent with an improvement in productivity. The full country breakdown will be published for the first time.

BoE Governor and MPC members to be quizzed by Treasury Select Committee
While politics will remain the focus in the UK, this morning will see BoE Governor Andrew Bailey, along with Chief Economist Huw Pill, Catherine Mann (a hawkish external MPC member) and Silvana Tenreyro (the only member to vote for a smaller 25bps hike in August) appear before the Treasury Select Committee to discuss the Bank’s most recent economic forecasts published in August’s Monetary Policy Report. The Committee members will likely be pressed for their views on the likely impact on the outlook for inflation and monetary policy of possible new fiscal policy initiatives to freeze household and business energy bills. The intention of new PM Truss to review the BoE’s monetary policy mandate is also likely to be discussed, as will the BoE’s possible reaction function to sterling weakness. Market expectations for a hike of 75bps in Bank Rate might well be firmed up on the back of their comments.

US trade deficit expected to narrow on the back of a drop in imports
A relatively quiet day for US releases brings the full trade report for July. The advance goods trade figures reported a narrowing of $9.5bn in the trade deficit in July, due to a drop of 3.5%M/M in imports that outpaced a more modest decline in exports (-0.2%M/M). The surplus in services trade has moved erratically in recent months, but it has drifted upward since mid-2021 and could make a small positive contribution in July.