Japanese GDP rebounds in Q4; UK employment edges down

Chris Scicluna
Emily Nicol

Japanese GDP rebounds in Q4 underpinned by a surge in spending on services, but output still below the pre-pandemic level
Broadly in line with expectations, Japan’s GDP rose 1.3%Q/Q (5.4%Q/Q annualised) in Q4, more than reversing the 0.7%Q/Q decline recorded in Q3 (which was a touch softer than previously estimated). This left full-year GDP in 2021 up 1.7%Y/Y, the first positive reading for three years, with output in Q4 just 0.2% below its pre-pandemic level – broadly similar to the performances of several euro area economies and the UK. Of course, that remains highly inferior to the vigour of the recovery in the US, with the economy last quarter some 3% above the pre-pandemic level, while output in China was some 10% above the pre-pandemic level and almost 3% higher in South Korea. Moreover, Japan’s output was still almost 3% below the pre-pandemic peak in Q319 ahead of the consumption tax hike in October that year.

Within the detail, growth was driven by a rebound in private consumption as the (short-lived) lifting of the state of emergency unleashed pent up demand. Household consumption rose 2.8%Q/Q in Q4, the second-largest increase since 1994 (the other being the rebound in Q320), driven by a 3½%Q/Q increase in spending on services. But despite rising for the third consecutive month, spending on services was still 3% lower than the pre-pandemic level. Expenditure on durable goods was up a sizeable 9.7%Q/Q in Q4, but this failed to reverse the near-16% drop in Q3. And while such spending was above the pre-pandemic level it was still almost 12½% lower than before the 2019 consumption tax hike.

Among the other expenditure components, non-residential investment rose for the third quarter out of the past four, albeit growth was modest at just 0.4%Q/Q and remained more than 3% lower than the pre-pandemic level. Meanwhile, residential investment remained very subdued, with a further 0.9%Q/Q drop last quarter leaving it more than 10% below pre-pandemic level. And public sector investment was similarly weak, contracting for the fourth consecutive quarter (-3.3%Q/Q), with government consumption also down in Q4 (-0.3%Q/Q). In contrast, a rebound in goods exports (1.6%Q/Q) saw total exports rise 1%Q/Q in Q4. And with imports down slightly, this left net trade adding 0.2ppt to GDP growth in Q4.

Looking ahead, public sector spending should be boosted in due course by the government’s latest fiscal package. But the current pandemic wave to hit Japan since the start of the year and renewed restrictions have raised the prospect of a quadruple dip. Certainly, surveys have signalled a sharp withdrawal of demand in January – e.g. the economy watchers survey recorded the steepest monthly decline in the headline index since April 2011 to a five-month low. And with the quasi-emergency measures having been extended in Tokyo and 12 other prefectures through to 6 March, and supply constraints likely exacerbated by pandemic-related restrictions elsewhere in Asia, we expect Japanese economic activity to remain subdued in February too.

UK employment edges down amid further uptick in inactivity towards year-end; vacancies reach new high; but regular pay falls sharply in real terms
The latest batch of UK labour market data were a mixed bag, consistent with continued tightness despite a softening of economic growth momentum amid the spread of Omicron. On the downside, employment dropped 38k in the three months to December, the first such decline in ten months, to leave the employment rate still 1.0ppt lower than before the pandemic. Additionally, inactivity continued to edge higher, up 31k 3M/3M to take the rate up to 1.0ppt above that ahead of the pandemic, with the rise on the quarter driven again by long-term sickness – seemingly an unwelcome legacy of the pandemic. As a result, therefore, the unemployment rate was unchanged at 4.1% in the three months to December, still matching the lowest rate in eighteen months albeit up 0.3ppt from the end of 2019. And other indicators pointed to significant dynamism in the labour market, with job-to-job moves at a record level due to the elevated quit rate and job vacancies also hitting new highs in the three months to January despite a further slowing in their rate of growth. With workers continue to eschew self-employment, the number of payrolled employees rose a further 108k to a new high in January.

In terms of wages, average total pay edged up 0.1ppt to 4.3%3M/Y in December. However, that left it down 0.1%3M/Y in real terms. Moreover, the pickup in nominal terms reflected bonuses, excluding which regular pay slowed a further 0.1ppt to 3.7%3M/Y, the lowest since May 2019, as the temporary distortions associated with composition and base effects continued to pass. And that left regular pay down a steep 0.8%3M/Y in real terms, further evidence of the squeeze in living standards even before taxes and household energy bills go up in April. At face value, that might suggest that recent BoE concerns of pay pressures have been overdone. However, the 3M/3M annualised rate of nominal regular pay rose to 4.5%, the highest since February. And business survey evidence of very strong pay expectations will likely sustain MPC worries of significant second-round effects on wages from current high inflation over the coming year. So, today’s data won’t deter the MPC from hiking Bank Rate again next month.

Updated euro area Q4 GDP data to confirm softer growth, but employment likely remained strong and returned to pre-pandemic level
Today brings updated euro area GDP figures for Q4 which are expected to confirm that growth slowed sharply from Q3 by 2ppts to 0.3%Q/Q reflecting the latest pandemic wave and persisting supply constraints. This notwithstanding, the accompanying preliminary employment numbers for the fourth quarter are likely to report another solid quarter of euro area jobs growth to take the number of people in work back above the pre-pandemic level for the first time. While the GDP data will not provide an expenditure breakdown, December’s goods trade numbers are likely to point to a marked decline in the surplus at the end of last year. The latest German ZEW investor survey is expected to signal a modest improvement in conditions so far in February and further improvement in expectations for the coming six months.

US PPI numbers due to show still elevated price pressures
Following last week’s stronger-than-expected CPI report, today’s US PPI figures are likely to report still elevated price pressures at the factory gate at the start of the year. However, with prices forecast to rise 0.5%M/M, below the average monthly increase in 2021 (0.8%M/M) and less than half the rate in January 2021, the annual PPI rate is expected to have eased by 0.8ppt to 9.1%Y/Y. 

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