Ongoing resilience in euro area jobs market

Emily Nicol
Chris Scicluna

BoJ Tankan signals improvement in business conditions in Q3, with auto makers the most upbeat since the start of 2019 and non-manufacturers the most optimist for almost 32 years
Today’s BoJ Tankan survey offered a comprehensive update on Japanese business conditions in the third quarter, with firms reporting a notable improvement in the economic assessments. In particular, the headline large manufacturing diffusion index (DI) beat expectations, rising for the second successive quarter, by 4pt to +9, the highest since Q222. There were notable improvements in sentiment among automakers, for which the respective DI rose 10pts to +15, the highest since the start of 2019, with food manufacturers the most upbeat since the start of 2018. But while manufacturers expected a further modest improvement in Q4 (up 1pt to +10), the strength of recovery in that sector continues to lag significantly behind that in services, which continues to benefit from pandemic-related pent-up and the return of overseas visitors.

Indeed, the headline non-manufacturing DI rose for a sixth consecutive quarter, by 4pts to +27, the highest since Q491. While the improvement was widespread with sentiment in the hospitality sub-sector rising to the highest since the series began in 2004, with an 8-year high reached in retail and a 3½-year high in construction, there was also a substantial jump in the utilities DI, up 36pts to +22, optimists having outweighed the pessimists in the sector for the first time since the start of the pandemic and the highest reading for 31 years. But given the strength of the figure for Q3, perhaps it’s unsurprising that the headline non-manufacturing DI was forecast to fall back to +21 in Q4.

Despite the recovery in economic conditions and forecasts for positive sales growth this year, firms still anticipated a decline in profits growth in FY23 as a whole amid high cost burdens. But profit margins at larger firms should benefit from a much weaker yen than currently assumed in their forecasts (¥135.88/$ in the second half of FY23) while SMEs might well see a larger hit than currently expected. Nevertheless, probably reflecting insufficient production capacity, firms remained remarkably upbeat about their investment intentions this year, revising up their forecast for capex growth by 1ppt to 13.0%Y/Y in FY23. Large firms forecast growth of 13.6%Y/Y, with manufacturers projecting an increase of 20.0%Y/Y. Admittedly, small manufacturers were forecasting a decline following a notable rise in FY22.

Tankan reports little change in inflation expectations, with large firms still expecting CPI to fall back below the 2% over the medium term
With respect to inflation, today’s survey reported only a modest easing in input cost burdens in Q3 for both manufacturers and non-manufacturers alike. But they remained elevated by historical standards. And the respective output price indicators edged slightly lower too, suggesting that firms continue to absorb some of their extra costs. Indeed, firms continued to expect only a relatively modest increase in their own prices over coming years, forecasting a cumulative increase of 4.4% over the coming five years, with large firms forecasting a rise of just 3.1-3.4% over that period. For now, at least, firms still expect CPI inflation to remain just above the BoJ’s 2% target in five years’ time. But this reflects higher expectations of small firms. Large firms are less convinced, forecasting inflation to fall back from around 2% in one year’s time to around 1½% in three- and five years’ time.

Looking ahead to the remainder of the week, the main focus will be the release of August labour earnings figures (Friday), which are expected to report a modest increase of 1.5%Y/Y, but still negative real wage growth in excess of 2%Y/Y. Friday will also bring the BoJ’s consumption activity index and household spending figures for August.

Euro area unemployment figures suggest ongoing resilience in the jobs market
Today’s release of euro area labour market figures for August suggested ongoing resilience in the jobs market despite the marked slowdown in economic momentum. Indeed, despite the decline in job vacancies and signals from various employment survey indicators, today’s release reported a further decline in the number of people in unemployment for the sixth month out of the past seven, by 107k, to 10.86mn a new record low. As such, the jobless rate fell 0.1ppt back to July’s record-low 6.4%. Despite the tight labour market and strong wage growth, the latest euro area retail sales figures (Wednesday) are likely to suggest lacklustre demand over the summer amid ongoing concerns about the economic outlook. Indeed, the final September PMI surveys – manufacturing (today) and services (Wednesday) – are likely to signal ongoing contraction at the end of Q3, albeit also suggesting that the bottom in the downturn may have now been reached. The euro area construction PMI (Thursday) will also continue to imply contraction in September, not least reflecting ongoing weakness in the housing sector. With the PMIs continuing to flag a disinflationary trend in the manufacturing sector, the euro area’s producer price inflation data (Wednesday) are expected to report an accelerated pace of decline in August from the drop of -7.6%Y/Y in July.

At the country level, in addition to the PMI survey results, this week brings the release on Thursday of German goods trade figures, as well as French and Spanish industrial production data for August, which will be followed on Friday by German factory orders data.

BoE’s survey to give an update on firms’ price and wage expectations
In the UK, the highlight this week will arguably be the latest results of the BoE’s Decision Maker Panel (DMP) survey on Thursday, with particular focus on firms’ price and wage expectations in September. In August, one-year ahead CPI inflation expectations decreased 0.6ppt to 4.8%, while expected year-ahead wage growth moved sideways at 5.0%, with the three-month rate moderating 0.1ppt to 5.1%. Ahead of this brings the publication of the BRC shop price index (tomorrow), which, against the backdrop of subdued demand, is expected to add to growing evidence of cooling inflation on the High Street. Meanwhile, the final PMIs – the manufacturing results (today) and services (Wednesday) – are likely to report mixed findings, with the preliminary release suggesting a slight increase in factory output prices but a moderation in the rise in services prices charged. In terms of activity, the flash PMIs suggested a further deterioration in economic momentum at the end of Q3, reflecting a notable step down in services. The construction PMIs on Thursday will also likely flag further contraction in the sector amid the ongoing downturn in the housing market.

Labour market report the US data highlight, and expected to report steady job growth in September
With the government shutdown avoided – at least until mid-November – a full week of US data is in store. The highlight will be the September labour market report (Friday). While initial jobless claims fell last month, Daiwa America’s Lawrence Werther expects non-farm payrolls to rise 160k, just below the consensus and just above the 150k average of the previous three months. As labour force growth is likely to slow, he suggests that the unemployment rate could remain unchanged at 3.8%. Average hourly earnings are expected to rise 0.3%M/M, up from August but in line with the average in the year to-date. The US dataflow for the week, however, gets underway today with the September manufacturing ISM survey – which Lawrence expects to point to contraction in the sector – and August construction figures. Lawrence expects the August JOLTS report tomorrow to report a further slowing in job openings to the lowest since early 2021, and the nonmanufacturing ISM survey on Wednesday to point to a softening of growth. Other data due this week include the full factory orders and trade reports for August. In terms of Fedspeak, Chair Jay Powell will participate in a roundtable discussion with Philly Fed President Harker, while plenty other FOMC members will speak publicly this week.

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