Data provide reminder of economic weakness

Chris Scicluna
Emily Nicol

A raft of soft economic data from Japan, China and Australia conspired to weigh on investor sentiment in the Asia-Pacific region today, with most major stock markets weaker and major government bonds firmer. For a second day, however, one exception to the negative showing in equity markets was China, where the CSI300 eked out a rise of 0.15% even as October’s figures for IP, retail sales and fixed investment missed expectations – the latter falling to a series low. (See the detail on these figures, and the other major data releases, below.)

But Japan’s Q3 GDP data came in weaker than expected too, reporting very subdued expansion even as some consumers (but seemingly not as many as expected) brought forward spending ahead of last month’s consumption tax hike and the steep drop in Korean visitors weighed on demand too. And with the yen firming for a second day (currently close to ¥108.7), equities weren’t impressed, with the Topix dropping for a second day and by 0.9%. JGBs were firmer with the curve flattening (10Y JGB yields down about 2.5bps for a second day to about -0.085%).

Meanwhile, ACGBs rallied and the AUD dropped more than ½% to a four-week low to give support to Australia’s equities as the country’s latest labour market data significantly disappointed, reporting a drop in employment for only the second time in more than three years. These data are all-important for the RBA, so expectations of a further rate cut by March have unsurprisingly taken a step back up.

Against that downbeat economic backdrop, USTs are also unsurprisingly firmer today, with 10Y yields down a couple of bps to close to 1.86% for the first time in a week. And euro govvies opened higher despite a slight upside surprise to German Q3 GDP, which saw the euro area’s largest member state avoid technical recession, albeit with the Q2 figure being revised down. Gilts are also stronger this morning ahead of today’s UK retail sales figures, which are also likely to be subdued. Most notable in the UK, however, today brings the deadline for parties to register candidates for next month’s general election, with all eyes on nationalist Brexit Party leader Farage to see whether he’ll stand aside in further seats – notably key Labour marginals – a move that would be calculated to boost the chances of a Conservative victory.

While Japan’s monthly consumption-related figures had suggested that a surge in spending ahead of October’s consumption tax hike would provide a notable boost to economic growth in Q3, the first estimate of GDP for that quarter fell short of expectations. Indeed, GDP growth slowed to just 0.1%Q/Q (0.2%Q/Q ann.) in Q3, from 0.4%Q/Q (1.8%Q/Q ann.) previously and the weakest for a year. Nevertheless, having expanded in each of the past four quarters, this left the annual rate rising 0.4ppt to 1.3%Y/Y, comfortably above potential and the fastest pace since Q218.

Within the detail, despite another solid increase in spending on durable and semi-durable goods (up 3.2%Q/Q and 1.7%Q/Q) respectively, overall household consumption rose an underwhelming 0.4%Q/Q in Q3, just half the pace seen in Q2, nevertheless still adding 0.2ppt to GDP growth. The slowdown in part reflected weakening domestic consumption of non-durable items and services.

Government consumption rose for the seventh quarter out of the past nine in Q3 (0.5%Q/Q), while public investment posted the third consecutive increase (0.8%Q/Q). And private investment also provided a modest boost to growth, with residential investment growth of 1.4%Q/Q the strongest since Q217 and capex up 0.9%Q/Q. So overall, final domestic demand added 0.4ppt to GDP growth. But like in the run up to the 2014 consumption tax hike, private inventories provided a notable drag on growth in Q3, knocking off 0.3ppt as firms chose to run down stocks.

Against the backdrop of weaker global growth, there was an unsurprising drop in exports in Q3 by 0.7%Q/Q. While exports of goods were up 0.3%Q/Q, exports of services fell more than 4%Q/Q – the most since Q212 – weighed by lower spending by overseas visitors (-6½%Q/Q) due to the significant decline in visitors from South Korea (down more than 50%Y/Y) related to the ongoing political and trade spat. So, with imports posting a very modest increase (0.2%Q/Q), net trade subtracted from growth (0.2ppt) for the fourth quarter out of the past six.

While the near-term outlook for Japanese exports remains subdued, private sector inventories might well provide a positive contribution to Q4 GDP. And today’s data offer some cautious optimism that the post-tax hike slump in domestic demand might not be as large as initially feared. This notwithstanding, GDP seems bound to contract in Q4 and the recovery thereafter is likely to remain relatively subdued.

In terms of inflation, at face value, today’s GDP release was more positive, with the headline deflator rising 0.2ppt to 0.6%Y/Y, the highest for 3½ years. But the domestic demand deflator – which offers a better guide to domestic underlying inflationary pressures – was more downbeat, falling 0.2ppt to 0.2%Y/Y, the weakest since Q117.

Today’s Chinese economic data added to the gloom, largely missing expectations, as activity weakened in October as the authorities celebrated the 70th year of the People’s Republic. So, fixed asset investment in urban areas slowed for a fourth successive month, with growth easing 0.2ppt to 5.2%YTD/Y, the weakest rate on the series dating back to the second half of the 1990s. The composition of capex was also hardly encouraging: while investment growth in SOEs ticked up slightly (7.4%YTD/Y), the equivalent figure for the private sector moderated (4.4%YTD/Y) to suggest that entrepreneurs are less convinced by the authorities’ efforts to support activity.

Meanwhile, having picked up in the prior month ahead of the national holiday, IP also slowed in October, down 1.1ppt to 4.7%Y/Y, although that left growth in the year to date unchanged at 5.6%YTD/Y for a third month. Growth in manufacturing output (falling 1.0ppt to 4.6%Y/Y but down just 0.1ppt on a YTD basis to 5.8%) and mining (down 4.2ppt to 3.9%Y/Y but just 0.1ppt YTD to 4.8%Y) was much weaker at the start of Q4. But power generation had a spurt (up 6.6%Y/Y and unchanged at 7.0%YTD/Y). Finally, retail sales also missed expectations, with year-on-year growth down 0.6ppt to 7.2%, matching April’s sixteen-year low, leaving the year-to-date figure down 0.1ppt at 8.1%.

Euro area:
Unlike the Japanese figures, German Q3 GDP beat expectations, avoiding technical recession but growth of 0.1%Q/Q was far from vigorous. Indeed, the figure for Q2 was revised down slightly to show a contraction of 0.2%Q/Q. And so German growth in Q3 failed to reverse fully that previous decline, and the annual growth rate ticked up just 0.2ppt to a still underwhelming 0.5%Y/Y, the second weakest in six years. While the detailed breakdown is still unavailable, the German statistical agency reported that growth came mainly from consumption. Having fallen the most in almost six years in Q2, exports also rose, while imports were little changed. But while construction investment was firmer, capex in machinery and equipment disappointingly fell back.

Given the German figure, the updated estimate of euro area Q3 GDP growth, due later this morning, seems highly likely to align with the flash estimate of 0.2%Q/Q (unchanged from Q2). Against this backdrop, euro area labour market figures are also likely to show employment growth in Q3 no firmer than the 0.2%Q/Q rate in Q2.

Finally, ahead of tomorrow’s release of final euro area inflation data for October, like yesterday’s German numbers this morning’s updated CPI estimates from France aligned with the flash figures, with inflation on the EU harmonised measure confirmed at 0.9%Y/Y, down 0.2ppt from September and the weakest in more than two years. Spanish inflation also matched the preliminary numbers, unchanged at 0.2%Y/Y matching September’s three-year low.

Elsewhere, ECB Vice-President de Guindos and Chief Economist Lane will speak today at events in London and Frankfurt. And the ECB should also publish any detail of agreements reached at today’s Governing Council meeting on non-monetary policy issues.

While politicking ahead of next month’s general election will dominate in the UK, the main British economic data focus will be on the release of October retail sales numbers. These are expected to show a modest increase in spending at the start of Q4 despite still weak consumer and retailer sentiment surveys.

After yesterday’s Aussie wage data saw growth ease in Q3 to its weakest in five quarters, today’s ABS employment report disappointed at the start of the fourth quarter. In particular, the total number of people in work fell in October (19k) for the first time in seventeen months and only the second time in more than three years, with a decline in full-time and part-time workers alike. And while this left employment still up a healthy 250k compared with a year earlier, the annual growth rate (2.0%Y/Y) ease to the weakest for 2½ years. So, while the participation rate edged slightly lower in October, unemployment rose (17.1k) for the sixth month out of the past eight. This left the number of people unemployed in October up 58k compared with a year ago, the largest annual increase since the start of 2015, and the unemployment rate up 0.1ppt to 5.3%.

So, overall today’s report offered a fairly gloomy assessment of recent jobs market developments in Australia, suggesting still significant spare capacity in the labour market. No surprise therefore that the RBA is still expected in due course to feel the need to ease monetary policy further to help boost the labour market and help push inflation back towards its 2-3% target range.

In the US, a quieter day for economic data will bring just October’s PPI figures and weekly jobless claims numbers.

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