Japanese PMIs flag diverging conditions

Chris Scicluna
Emily Nicol

Japanese PMIs flag diverging services and manufacturing conditions
Today’s flash PMIs suggested that Japan’s economy registered another month of modest growth in February, with the composite output index moving sideways at 50.7 to leave it trending some 0.6pt above the Q4 average. But the detail of the report offered mixed messages for the sectors. Encouragingly, the services sector continues to benefit from the release of pent-up pandemic demand and the relaxation of international travel restrictions. Indeed, the services activity index rose for the third consecutive month, by 1.3pts to 53.6, an eight-month high and the second-strongest reading since August 2015. And the BoJ will note that firms widely attributed higher input costs in the sector – the respective PMI rose to an eight-month high and at 63.6 was some 11½pts above the long-run average – to wage costs as well as energy prices. Meanwhile, today’s survey implied that, despite a further easing in supply bottlenecks, conditions remained extremely challenging for Japanese manufacturers. Indeed, the output PMI for the sector dropped 2.3pts in February to 44.9, the weakest for more than 2½ years, with the new orders index down 2.4pts to 43.4, similarly the lowest since July 2020. 

Flash euro area PMIs to point to further modest improvement; car registrations up in January but still well down on pre-pandemic levels
After yesterday’s flash Commission consumer confidence index rose to its highest level for a year in February, today’s flash PMIs are similarly expected to signal a further modest improvement in business conditions. Indeed, having rising back above the key-50 mark in January for the first time in seven months, the composite PMI is expected to rise almost ½pt to 50.7, albeit to be consistent with only modest growth this month. The flash French composite PMI, just published, surprised on the upside, rising 2.5pts to 51.6, a seven-month high to leave it trending some 1pt above the Q4 average. This reflected a marked improvement in services activity, for which the respective PMI jumped 3.4pts to 52.8, the highest since September. However, like in Japan, manufacturing conditions in France remained challenging in February, with the output index down 1.6pts to 45.9, with the new orders index slumping 2.7pts to 43.9. The German PMIs, as well as the ZEW investor survey will be published shortly.

Meanwhile, the latest new car registration figures, published by ACEA this morning, suggested ongoing recovery at the start of the year as supply-chain strains continue to ease. In particular, euro area car registrations were up 12.1%Y/Y, with solid growth in France (8.8%Y/Y), Italy (19.0%Y/Y) and Spain (51.4%Y/Y) offsetting a decline in Germany (-2.6%Y/Y). This notwithstanding, euro area new car sales were still more than a fifth below the pre-pandemic level in January 2020 and almost a third below the peak in January 2018.

Ahead of next month’s Budget, UK fiscal figures beat expectations again despite another monthly record for debt interest
This morning’s UK public finances figures once again beat expectations. Public sector net borrowing excluding banks (PSNB ex) registered a surplus of £5.4bn in January compared to the median forecast on the Bloomberg survey of a deficit of £7.9bn. Surpluses in January are the norm due to the timing of self-assessment tax payments. But receipts of such taxes rose to a record high and above expectations last month. And that helped to offset the impact of the exceptional spending on energy support as well as another record month for debt interest payments due to the impact of high inflation on linkers, which pushed central government spending a little more than £20bn higher than the level in the same month last year. The better-than-expected figures for January left the cumulative level of PSNB (ex) in the financial year to-date at £116.9bn, up £7.0bn from the same period in FY21/22 but a hefty £30.6bn less than the forecast by the OBR (after adjusting for differences of assumptions on student loans). That, along with the recent marked drop in wholesale gas prices which should reduce the cost of energy price support over coming months, as well as the drop in inflation and Gilt yields from their respective peaks last autumn, might suggest that the Chancellor will have room for manoeuvre on fiscal policy when he announces his Budget on 15 March. Among other things, we should certainly expect new budgetary measures to try to boost labour force participation and the Chancellor might also boost his energy price support payments. However, like the BoE in its recent Monetary Policy Report, the OBR is likely to decide that its assumption on potential growth needs to be revised down significantly with adverse consequences for both the medium-term fiscal outlook and the scope for budgetary giveaways.

Later this morning will bring the flash PMIs for February. In January, the services index fell to a two-year low of 47.9, while the manufacturing output index (47.0) recorded the seventh consecutive sub-50 reading. So, while these might well report a slight easing in the pace of decline this month, the headline composite activity PMI is likely to remain consistent with contraction, reflecting not least subdued domestic demand. The CBI’s industrial trades survey is similarly expected to report subdued output amid lacklustre demand.

US flash PMIs, Philly Fed non-manufacturing index and existing home sales figures due
Like elsewhere, today will bring flash February PMIs from the US, which are likely to point to a modest easing in the pace of decline this month, but leave the manufacturing and services activity indices firmly in contractionary territory, which contrasts markedly with the services ISM that in January signalled ongoing solid expansion (55.2). The Philly Fed’s non-manufacturing activity index for February is also due, along with existing home sales figures for January. 

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