Japanese GDP revised down, German exports slow

Chris Scicluna

Japan’s GDP marginally weaker in Q2 than first estimated
A reasonably busy day for economic data in Japan featured a revised assessment of the country’s economic performance in Q2 and some early insight into how the economy is performing in the current quarter. Starting with the former, Japan’s GDP is now estimated to have declined 7.9%Q/Q in Q2, just fractionally weaker than the preliminary estimate of a 7.8%Q/Q contraction. As signalled last week by the MoF’s corporate survey, business capex was substantially weaker than first estimated, with a slump of 4.7%Q/Q now recorded compared with the 1.5%Q/Q decline that was estimated previously. Spending on transport equipment plunged, while that on other plant and equipment was down 5.0%Q/Q.

Fortunately, the downward revision to capex was offset somewhat by a slightly less dire assessment of consumer spending (now down 7.9%Q/Q, compared with an initially estimated 8.2%Q/Q decline) and a more positive assessment of private inventories (now estimated to have added 0.3ppt to quarterly GDP growth, rather than the flat result indicated previously). Net exports subtracted an unrevised 0.3ppt from GDP growth, with exports and imports down 18.5%Q/Q and 0.5%Q/Q as was first reported. Nominal GDP growth was unrevised at -7.6%Q/Q while the GDP deflator is now estimated to have increased 1.3%Y/Y, down from 1.5%Y/Y previously.

Japanese household data soft in July
Turning to today’s slightly more contemporary news, the MIC’s survey of household spending and incomes confirmed the still weak picture that was evident in yesterday’s more reliable BoJ data. Real household spending fell 6.5%M/M in July, thus partially reversing the 13.0%M/M rebound that was recorded in June. This amounts to an annual contraction of 7.6%Y/Y compared with 1.2%Y/Y previously. MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, was similarly downbeat with a decline of 5.6%Y/Y recorded in July.

The picture regarding labour incomes was also weak, with the preliminary Monthly Labour Survey reporting that labour cash earnings declined 1.3%Y/Y in July following a revised 2.0%Y/Y decline in June (previously reported as a fall of 1.7%Y/Y). As was the case last month, earnings remained depressed by a 16.6%Y/Y slump in overtime earnings, largely due to a 15.3%Y/Y decline in overtime hours worked. Regular earnings still rose 0.3%Y/Y, albeit down from 0.4%Y/Y in June, despite regular hours worked falling 1.4%Y/Y. Total hours worked fell 2.4%Y/Y but the number of people in regular employment still rose 0.6%Y/Y – the latter growth unchanged from last month. While labour incomes remain weak, MIC’s measure of workers’ disposable incomes rose 11.7%Y/Y, continuing to be boosted – at least for now – by transfers associated with the government’s relief package. However, given low levels of consumer confidence, many households are likely to remain very cautious about spending these payments over the near term at least.

Japanese economic sentiment remains weak in August, albeit improving
Today the Cabinet Office also released the results of the Economy Watchers survey for August. In summary, the overall tone of the survey was firmer than in July, but still soft relative to the levels generally reported in recent years. The headline current conditions DI recorded its fourth consecutive increase, rising 2.8pts to 43.9 – actually the highest reading since September last year. Readings improved across both the household and business sectors, although the latter index (up 3.3pts to 41.1) remains weaker than it was at the beginning of this year. Looking ahead, respondents to the survey were less inclined to be downbeat about the near-term outlook, with the overall expectations index rising 6.4pts to 42.4. However, this reading is still a little weaker than had been recorded in June – before renewed pessimism was spurred by rising coronavirus cases – and still about 7pts shy of the average recorded between 2015 and 2019. Taken together with a still very subdued composite PMI (45.2 in August), today’s survey continues to point to a less than vigorous recovery from the economic trauma experienced in Q2.

Growth in Japanese bank lending picks up in August
Bank lending rose a further 0.2%M/M in August, following an upwardly-revised 0.5%M/M increase in July. Combined with base effects, this conspired to lift annual growth in lending to 6.7%Y/Y. This is the fastest pace recorded since these statistics were first compiled in the early 1990s, and largely reflects the significant ramping up of liquidity that was sought by firms during Q2. Despite a small decline in outstanding loans during the month, annual growth in lending by the major city banks increased slightly to 8.0%Y/Y. Growth in lending at regional and shinkin banks picked to 5.3.%Y/Y and 7.3%Y/Y respectively. Combined with government support, this liquidity has helped generate a 1.6%Y/Y decline in corporate bankruptcies in August. Unfortunately, it seems unlikely that such favourable figures will be sustained given the likelihood of continued weak economic conditions in the near term at least.

Trump says will reduce US reliance on China “once and for all”
Perhaps predictably, coming a day after China reported its largest bilateral trade surplus with the US in almost two years, President Trump used a White House news conference to reiterate his intention to reduce US economic ties with China. Trump again vowed to make it difficult for US firms to manufacture offshore, threatening them with tariffs on their exports back into the US. And he suggested that US firms that outsource production offshore would be prohibited from bidding for federal contracts. So, while European equities had enjoyed solid gains on Monday, equity market gains in Asia were initially more subdued today, although bourses in China and Hong Kong subsequently shrugged off concerns to be up on the day while Japan’s Topix closed up almost 0.7%. Needless to say, investors should anticipate plenty more anti-China rhetoric – and action – from Trump over the coming two months.

Australian business sentiment remains soft in August
In Australia firms’ assessment of business conditions deteriorated in August for the first time since April, very likely reflecting the extension of coronavirus-related restrictions in the state of Victoria. The closely watched business conditions index fell 6pts to -6, largely unwinding the improvement recorded in July but leaving the index well above the dreadful -34 recorded back in April when coronavirus-related restrictions were in force across the country. Perhaps not surprisingly, the employment index was especially hard hit, declining 11pts to -13 – the worst reading since May – while the capex index fell 9pts to -13. And while the headline business confidence index rose 6pts to -8, this reading was still weaker than seen back in June.

Employment shows signs of stabilising in Australia
In other news, the ABS released the latest instalment of its new weekly employment indicator, which aims to use tax data to assess the high frequency impact of coronavirus on the labour market. The ABS reported that the number of payroll jobs fell 0.4% over the month to 22 August, with a decline of 2.0% in jobs in Victoria more than offsetting a modest 0.1% gain across the remaining states. This brings the cumulative decline since mid-March to 4.2%, with payrolls down 7.9% in Victoria but an average of 2.9% elsewhere. More hopefully, the ABS did note that the decline in jobs in Victoria during the most recent week was smaller than that seen earlier in the month. Victoria reported a further 55 new coronavirus cases today – up from the 10-week low of 41 cases reported yesterday, but still a sharp improvement on the state’s experience through August.

German export growth moderates in July, imports remain subdued
Consistent with many other indicators which suggested a moderation in recovery momentum at the start of Q3, and broadly in line with expectations, German exports in nominal terms rose 4.7%M/M in July having risen almost 15%M/M the prior month to be still down 10.9%Y/Y and more than 12% from the pre-lockdown level in February. But growth in the value of imports was even more subdued, up just 1.1%M/M following growth of 7.0%M/M previously to be down 11.3%Y/Y and similarly down about 12% from February. So, Germany’s trade surplus increased by about €3.5bn to €18bn, the highest in seven months.

Adjusting for price changes, German export volumes rose 4.6%M/M in July following a rise of 14.8%M/M the prior month to be down 9.8%Y/Y and about 11% down from February’s level. Import volumes rose 0.6%M/M in July following growth of 6.2%M/M in June to be down 7.2%Y/Y and about 8% down from February’s level. So, net trade looks to have provided support to German GDP growth at the start of Q3, having subtracted 2.8ppts from growth in Q2.

Today's remaining euro area data
Looking ahead, Italian retail sales numbers for July are due shortly and – like many other recent data series – are expected to post a decline at the start of Q3 after a double-digit percentage gain (+12.1%M/M) in June, leaving sales still down compared to a year earlier. In addition, revised euro area GDP figures for Q2 will confirm that output contracted at a record pace last quarter, close to the previous estimate of 12.1%Q/Q, to leave output more than 15% below its pre-pandemic peak. More noteworthy than the headline numbers will be the expenditure breakdown – due to be released for the first time – which will nevertheless no doubt see steep declines in private consumption, investment and trade alike. Employment data for Q2 are expected to confirm the initial estimate of a drop of more than 4.5mn to 155.9mn, the lowest level for three years. And sticking with the jobs market, German labour cost data for Q2 are also out.

Survey suggests ongoing growth on the UK high street last month
The BRC’s retail sales monitor for August, released overnight, suggested that last month saw decent growth on the high street. Possibly benefiting from a boost to shopping-centre footfall from the Government’s “Eat out to help out” restaurant meal subsidies, the BRC survey’s measure of like-for-like sales was up 4.7%Y/Y in August, with total sales up 3.5%3M/Y. While food sales again led the way, up 3.5%3M/Y, non-food sales on the BRC measure were up 1.4%3M/Y, the first positive reading since before the lockdown in February. We note, however, that the CBI's distributive trades survey for August, published a couple of weeks ago, suggested that, after rebounding above the pre-lockdown level in July, retail sales fell back last month.

Today’s US dataflow
The US data-flow for the week gets underway this morning with the NFIB small business sentiment survey, and the July consumer credit report out later on.

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