UK: Brexit trade deal imposes substantive new barriers to trade with the EU
In Europe, the holiday period was most notable for the worsening of the second wave of Covid-19, which raises the risk of a contraction in GDP in UK and the euro area in Q1 following the likely drop in Q4, as well as the coming into force from 1 January of the historic UK-EU Trade and Cooperation Agreement (UK-EU TCA), which erected significant new obstacles to post-Brexit trade between the UK and EU.
In terms of that post-Brexit agreement, tariff-free and quota-free access for goods traded between the UK and EU was maintained for most products. But that trade is now subject to new customs documentation, procedures and other non-tariff barriers, including new ‘rules of origin’ requirements. And for many services firms, the agreement constrains or indeed prevents altogether continued trade between the UK and EU. So, the TCA represents the imposition of major new obstacles to trade and substantive new costs for exporting businesses. Trade volumes between the two partners will be lower than they otherwise would have been. The attractiveness of the UK as a destination for investment has been significantly tarnished. And the levels of productivity, overall economic activity and living standards in the UK will also be persistently lower than would otherwise have been the case.
Indeed, the TCA was notable for its lack of cooperation in numerous areas, rendering the UK-EU agreement inferior to those previously reached between the EU and other developed countries (e.g. Canada and Switzerland). For example, no deal was reached on the mutual recognition of regulatory conformity assessments for goods, or on sanitary and phytosanitary (SPS) checks for agri-food products. And, in terms of services, the EU and UK also ended the mutual recognition of professional qualifications in several subsectors while the EU introduced new constraints on the extent to which UK service providers can access its customers.
In addition, in many areas agreements were simply not brought to a final conclusion, with negotiations and assessments set to continue. Financial services were left particularly short-changed, with the EU and UK merely pledging to set out a “framework” for regulatory cooperation by March. Perhaps unsurprisingly too in light of the Johnson government’s negotiation stance, the EU failed to mirror the various financial services equivalence decisions granted by the UK, instead leaving in place just its temporary equivalence decisions for clearing and central securities depositories made in light of financial stability risks. Temporary arrangements were also put in place to allow data to continue being transferred from the EU to the UK for four months (extendable to six months) while the European Commission undertakes an assessment of the UK’s ‘adequacy’ in this area.
Among other things, the UK-EU TCA also established a new governance structure in which the UK and EU will seek to resolve their differences going forward, including with respect to the maintaining the so-called ‘level playing-field’, agreed to try to prevent one side gaining competitive advantage over the other by easing regulation with respect to the environment, labour markets, and state aid – something that UK PM Johnson had previously argued he could never sign up to. The new structure allows scope for the UK and EU to take punitive ‘remedial’ action against imports from the other market while that process is implemented – a possible source of ongoing tension and uncertainty.
Japan’s labour market strengthens in November even as IP prints flat and pandemic weighs on retail sales; falling food prices drive most of downside surprise to Tokyo CPI in December
As usual, the Japanese dataflow continued apace during the holiday period. As far as economic activity was concerned, the key release was the preliminary IP report for November. Disappointingly, after five consecutive months of recovery, output was unchanged during the month and so down 3.4%Y/Y (markets had expected growth of about 1%M/M). Shipments fell an even more disappointing 0.9%M/M – the first decline since May – and so were down 3.8%Y/Y. Even so, inventories fell 1.1%M/M (down 8.7%Y/Y) and the inventory-shipments ratio fell 1.8%M/M (down 1.2%Y/Y).
In the detail, thanks to stronger output of machinery, production of capital goods increased a further 2.1%M/M in November, reducing the annual decline to just 1.0%Y/Y. However, output of motor vehicles fell for the first time in six months, and production of consumer durable goods fell 4.4%M/M. Production of non-durable consumer goods and construction goods fell 0.6%M/M and 1.8%M/M respectively. As far as the near-term outlook is concerned, firms forecast a further 1.1%M/M decline in output in December – less than the 2.4%M/M decline forecast last month – but a very bullish 7.1%M/M lift in output in January. As usual, both forecasts are bound to be too optimistic. That said, given the significant growth recorded early in the quarter, manufacturing output still appears to be well on track for a 6%Q/Q lift in Q4, following on from the 8.8%Q/Q rebound recorded in Q3.
In other activity news, pandemic-related restrictions weighed heavily on retail sales in November. While analysts had expected some decline in sales, the 2.0%M/M fall was much larger than expected and left sales up just 0.7%Y/Y (the latter still somewhat flattering given the fall-off in spending following the 2019 consumption tax hike). Spending on household machines increased 7.2%M/M, but spending fell across all other categories, including a 3.8%M/M decline in general merchandise. That said, this coming Friday’s BoJ Consumption Activity Index will provide a more comprehensive assessment of consumer spending during the month (and one that aligns much more closely to the measure in the national accounts). In construction news, housing starts increased fractionally in November but were still down 3.7%Y/Y. Meanwhile, Japan’s largest construction companies reported that construction orders fell 4.7%Y/Y in November.
News from Japan’s labour market, however, was a notable bright spot, with household employment rising 430k in November and so reducing the annual decline in jobs by 0.5ppts to 0.9%Y/Y. Moreover, despite a sizeable increase in the labour force, the unemployment rate fell an unexpected 0.2ppts to a 4-month low of 2.9%. In addition, the MHLW reported an unexpected 0.02x increase in the effective jobs-to-applicants ratio to 1.06x in November. The number of outstanding job offers increased 3.0%M/M (reducing the annual decline to 21.7%Y/Y), while the number of new job offers increased 9.2%M/M (but was still down 21.4%Y/Y).
Turning to inflation, the advance Tokyo CPI for December proved much weaker than the market had expected, with prices declining 0.4%M/M and so lowering annual inflation to -1.3%Y/Y, 0.5ppts below the median forecast and the weakest outcome since May 2010. As over the previous two months, most of the downside surprise was due to sharply lower prices for fresh food, which fell a further 4.2%M/M to be down 8.6%Y/Y. As a result, the BoJ’s forecast measure of core inflation fell a less worrying 0.1%M/M, but was still down 0.9%Y/Y – a notch below market expectations. With prices for fuel, gas and electricity declining for a 7th consecutive month, additional downside impetus was provided by a further 1.5%M/M decline in energy prices – now down 10.2%Y/Y. Therefore, the BoJ’s preferred measure of core prices – which excludes both food and energy – was unchanged during the month. While these prices have moved fractionally higher over the past four months, base effects mean that annual inflation for this measure fell 0.2ppts to -0.4%Y/Y in December – the lowest reading since July 2013. Similarly, the narrower measure of core prices used overseas – which excludes all food and energy – was steady in December, but annual inflation still weakened 0.2ppts to a 5-month low of -0.5%Y/Y.
China’s official PMIs soften slightly in December, industrial profits continue to grow in November
Most of the interest in China over the holiday period was centred on the official PMI readings for December. After a reaching a more than 3-year high in November, the closely watched manufacturing PMI receded 0.2pts to 51.9, with modest improvement amongst medium-sized firms offset by slightly weaker readings for large and small firms (the index for the latter group falling back below 50). The key activity sub-components all weakened slightly from their prior multi-year highs, with the output index down 0.5pts to 54.2, the new orders index down 0.3pts to 53.6 and the new export orders index down 0.2pts to 51.3. However, the input prices and output prices indices increased 5.4pts and 2.4pts to 68.0 and 58.9 respectively – in both cases the highest readings since 2017.
Turning to the non-manufacturing sector, after hitting an 8-year high last month, the headline PMI fell a somewhat larger 7pts to 55.7 in December – albeit still a robust reading. As with the manufacturing PMI, the key activity sub-components were slightly weaker, while the pricing indicators were notably firmer. Indeed, the output prices index increased 1.3pts to 52.3, marking the highest reading since January 2018. Coming off a low base, this should translate into a gradual lift in core inflation over coming months. The composite PMI output index fell 0.6pts to a 3-month low of 55.1 – still well above the average reading since this index was first calculated in 2017.
In other news, after hitting a more than 9-year high in October – exaggerated by a weak base – growth in Chinese industrial profits fell back to 15.5%Y/Y in November. However, coming after pandemic-driven weakness earlier in the year, growth in cumulative profits for the year-to-date improved further to 2.4%YTD/Y. In the detail, due to weakness in coal and petrochemical industries, cumulative profits were still down a whopping 32.8%YTD/Y in the mining sector. However, profits in the manufacturing sector increased 6.1%YTD/Y despite a 44%YTD/Y decline in the oil refining industry, with double-digit growth recorded in the telecommunications, machinery, pharmaceutical, chemical and non-ferrous metal smelting industries.
US: Data mostly point to weakening forward momentum in Q4 as coronavirus cases surge
Following confirmation of a sizeable 33.4%AR rebound in GDP during the Q3 – just 0.3ppts firmer than reported previously – the subsequent US economic dataflow generally disappointed market expectations. One bright spot was durable goods orders, which increased 0.9%M/M in November following an upwardly revised 1.8%M/M advance in October (core capex orders increased 0.4%M/M, following a 1.6%M/M lift in October that was double that reported previously). However, personal spending fell 0.4%M/M in November following a downwardly-revised 0.3%M/M increase in October. In part, this likely reflected a 1.1%M/M decline in personal income, as a further 0.4%M/M in employee compensation was offset by an 8.5%M/M decline in proprietors income (especially farm income) and a 3.3%M/M decline in government transfer payments (due to fading support from the CARES Act). The substantial recovery in the housing market also showed signs of losing steam, with existing home sales falling 2.5%M/M in November and new home sales plunging 11.0%M/M to the lowest level since June. In addition, pending home sales fell a further 2.6%M/M in November, albeit remaining up 16%Y/Y. In trade news, the advance report indicated a wider-than-expected merchandise trade deficit of $84.8bn in November, with a 2.6%M/M lift in imports outstripping a 0.8%M/M increase in exports. This suggests that net exports will likely make a further negative contribution to GDP growth in Q4. In the labour market, initial jobless claims edged below 800k in the week to 26 December.
The rising incidence of coronavirus – which likely impacted the aforementioned activity data to some extent – had a pronounced impact on the Conference Board’s measure of consumer confidence, with the headline index slumping to a 4-month low of 88.6 in December from a downwardly-revised 92.9 in November. The University of Michigan’s consumer sentiment index – which had fallen sharply a month earlier – finished at 80.7 in December, which was down slightly from the preliminary reading but an improvement on the final November reading. Business survey data was mixed, with the Chicago PMI increasing an unexpected 1.3pts to 59.5 in December but the Dallas Fed’s manufacturing index falling to a 4-month low of 9.7.
In inflation news, the core PCE deflator provided no surprises with a second-consecutive flat reading in November leaving annual inflation steady at 1.4%Y/Y – well below the Fed’s target.
Australia: retail sales and imports surge, credit growth still soft
Preliminary data from Australian retailers pointed to a whopping 7.0%M/M lift in spending in November, far outstripping expectations and raising annual growth to a huge 13.2%Y/Y. The first full month of unrestricted trading in the state of Victoria saw sales surge 21%M/M, but outside of Victoria spending still increased by a considerable 2.7%M/M. According to the ABS, the largest increase in spending was recorded for household goods – boosted further by Black Friday sales – but spending was said to have increased significantly across all categories aside from food.
In other news, preliminary data on merchandise trade pointed to a modest 1.0%M/M lift in exports in November, which nonetheless remained down 4%Y/Y. A 45%M/M jump in exports of non-monetary gold accounted for most of the growth, as other non-rural exports fell 4%M/M and were down 7%Y/Y. Imports jumped 11%M/M in November and so were up 10%Y/Y. Of particular note was a 35%M/M surge in imports of capital goods (led by aircraft), while imports of consumption goods increased just 2%M/M but were up 15%Y/Y – the latter broadly in line with the aforementioned growth in retail spending. Together these point to an unadjusted trade surplus of A$2.0bn in November – about A$3.9bn smaller than a year earlier and much smaller than analysts had expected.
Finally, the RBA reported that private sector credit grew just 0.1%M/M in November, lowering annual growth to a more than 10-year low of 1.7%Y/Y. Business sector credit fell 0.2%M/M – the 7th consecutive decline and so lowering annual growth to just 0.9%Y/Y – while housing credit increased 0.3%M/M and 3.4%Y/Y. After falling steeply since the onset of the pandemic, other personal credit was steady in November but still down 12.4%Y/Y.