Japanese wages jump in nominal terms

Chris Scicluna
Emily Nicol

Japanese wages jump in December at the strongest rate for 26 years
Today’s Japanese labour earnings figures will have provided a boost to confidence at the BoJ, significantly beating expectations with total wage growth jumping 2.9ppts to 4.8%Y/Y, the strongest rate for almost 26 years. The improvement principally reflected a surge in winter bonus payments, which were up 7.6%Y/Y, with double-digit growth in construction, real estate, transport and postal activates and hospitality. But there were also encouraging signs with respect to regular earnings, with growth accelerating 0.3ppt to 1.8%Y/Y, the fastest since February 1995. This compares with growth of just 0.1%Y/Y a year ago, the pre-pandemic ten-year average of -0.1%YY and the long-run average of 0.3%Y/Y. So, despite the surge in inflation at the end of last year, real wage growth eked out a very modest positive reading in December (0.1%Y/Y), albeit having been in negative territory in the previous eight months.

Japanese spending declines in December, but still rises in Q4
Despite those firmer wage data, Japan’s household expenditure survey, also published today, suggested that real disposable income continued to decline at the end of last year in year-on-year terms (-1.7%Y/Y). And so, household spending was unsurprisingly weak at the end of last year. In particular, total spending dropped for a second successive month, by 2.1%M/M, although the drop in spending on core items was less marked (-0.3%M/M). The BoJ’s consumption activity index – arguably the best timely guide to the national accounts measure of household expenditure – fell 0.8%M/M in December, with declines in spending on durable goods (-0.4%M/M) and services (-0.6%M/M) alike. Nevertheless, given pent-up demand at the start of the fourth quarter amid the further relaxation of restrictions, this still left real consumption activity up 0.7%Q/Q in Q4. Given higher prices, nominal spending was up a much stronger 2.4%Q/Q. And with consumer confidence still historically weak, spending likely remained subdued at the start of this year.

German IP ends 2022 firmly in reverse as efforts to cut energy use were maintained
German industrial production fell more than expected at the end of 2022, dropping 3.1%M/M, more than three times the consensus forecast. That left it down 3.9%Y/Y and more than 8½% below the pre-pandemic level in February 2020. And overall IP in Q4 was therefore down for the third successive quarter and by 0.7%Q/Q. The data were very weak in several sectors. Manufacturing and mining output fell 2.1%M/M, dragged lower once again by a further steep decline in production of energy-intensive items, which fell 6.1%M/M to be down a whopping 19.6%Y/Y. Most notably within that component, output of chemical products fell 11.2%M/M to be down more than 18%Y/Y and 12%Q/Q. As a result, production of intermediate goods dropped 5.8%M/M to be down 4.0%Q/Q in Q4.

In contrast, however, supported by a further rise in autos and related parts, capital goods output was unchanged on the month to be up a firm 3.9%Q/Q in Q4. And consumer goods rose 0.3%M/M, although that was not enough to prevent a drop of 1.2%Q/Q in Q4. Beyond manufacturing, energy production fell 2.3%M/M in December to be down for a third successive quarter and by a marked 7.8%Q/Q in Q4. And in part due to a cold snap in the weather, construction output fell 8.0%M/M in December to be down 1.8%Q/Q in Q4. Looking ahead, surveys point to slightly firmer confidence in Germany’s industrial sector at the start of the year not least due to a moderation in cost pressures, the easing of concerns about energy supply, and the ongoing healing in supply chains. However, the continued steady downtrend in new orders, as well as persisting downside risks to future domestic and external demand, point to a possible further decline in German IP in Q1.

Spanish IP ticks up in December but also subtracts from GDP growth in Q4
In contrast to Germany, Spanish industrial production (excluding construction) rose at the end of 2022, rising 0.8%M/M in December to be marginally above the level in February 2020 ahead of the pandemic. That, however, followed three successive months of declines, and so Spanish IP dropped for the second successive quarter in Q4 (down 0.6%Q/Q). Within the detail, overall production at the end of the year was supported by the auto sector, helping capital goods output to rise 2.8%M/M in December and 0.8%Q/Q in Q4. Output of consumer goods also rose in December to be up 1.5%Q/Q in Q4. So, as in Germany, output of intermediate goods was the key source of weakness in Spain, down 1.6%M/M and 1.4%Q/Q.

UK retail survey suggests a weak start to the year
According to today’s BRC retail sales monitor, and tallying with the recent CBI survey, spending on the UK high street disappointed at the start of the year. Indeed, total sales growth in nominal terms slowed 2.7ppts to 4.2%Y/Y in January, with like-for-like sales down to 3.9%Y/Y. This was in spite of a reported pickup in inflation on the High Street at the start of the year. Indeed, when adjusting for the BRC’s shop price inflation measure, retail sales volumes were down 3.8%Y/Y in January, the tenth consecutive year-on-year drop. Indeed, while retailers suggested that demand for own-brand items remained popular, and discounting provided support to clothing sales, spending on big-ticket items was reportedly down. And with consumer confidence still historically weak, real disposable incomes declining sharply, borrowing costs rising and the economic outlook still highly uncertain, household expenditure will remain extremely subdued for the time being.

UK house price inflation continues to slow
Given the surge in mortgage rates since the summer, the housing market remains a key downside risk to the UK economic outlook. And while today’s Halifax house price index suggested some stability in January, with prices unchanged on the month, this followed significant weakening at the end of last year. Indeed, the average UK house price was down 3.6%3M/3M in January to be now more than 4% below its August peak. As a result, the annual increase slowed to just 1.9%Y/Y, from the peak of 12½%Y/Y in June. Taken together with the slump in mortgage approvals in December, and the extremely downbeat expectations of future sales and prices in the RICS survey, we expect to see a further fall in house prices over coming months, probably taking the peak-to-trough decline to 10% or more.

US trade deficit likely widened in December; Powell discussion on outlook the highlight
In the US, today will bring the full trade figures for December, which are likely to confirm a widening of the trade deficit as suggested by the worsening in the advance goods trade deficit (by $7.4bn to $90.3bn). The surplus in services trade might also cool after back-to-back increases pushed it to the top of the range of the past few years. But not least following last week’s strong payrolls report, likely of most interest today will be Fed Chair Powell’s discussion on the economic outlook at the Economic Club of Washington. 

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