BoJ consumption activity index points to sharp decline in spending on services

Chris Scicluna
Emily Nicol

ECB could leave asset purchase plans unchanged as it takes stock of extremely uncertain outlook
The main event of the week will be the ECB’s policy announcements on Thursday. Ahead of Russia’s invasion of Ukraine, and in light of the marked deterioration in the inflation outlook over the past couple of months, this seemed bound to bring an accelerated pace of reduction in the central bank’s net asset purchases to free up space for a rate hike by year-end. However, while its impact on energy and commodity prices, as well as renewed disruption to supply chains and euro weakness, has added a further massive inflationary impulse, the precise path and duration of the conflict, and impact of sanctions and countermeasures, are impossible to predict with confidence. And within the wide range of plausible outcomes, given the prospect of sharp declines in real incomes, big hit to confidence and renewed tightening of supply bottlenecks, the invasion will have a highly negative impact on growth.

Indeed, a recession in the euro area is now well within the realms of possibilities. And if economic output weakens, and energy prices follow the path currently implied by futures markets, then inflation would still be expected to fall back below the ECB’s target in two to three years’ time. In updating its economic projections, we expect the ECB to publish a range of possible scenarios this week. And given the extreme uncertainty, we expect it to be cautious in terms of policy, leaving unchanged its plan to reduce its monthly net asset purchases to €40bn in Q2 and €30bn in Q3, while insisting it will be flexible adjusting to the evolving outlook as the year goes on.

BoJ consumption activity reports sharp decline in spending on services in Japan
With coronavirus cases having leapt at the start of the year and the government having reintroduced containment measures, the weakness in Japanese household spending at the start of the year should have come as no surprise. In particular, the BoJ’s consumption activity index fell sharply in January, with the 3%M/M drop the steepest since May. The weakness inevitably stemmed from reduced consumption of services, down 4.3%M/M, to leave it roughly 11½% below the pre-pandemic level, while expenditure on non-durable items was down for the second successive month (-2.2%M/M) to be more than 3% lower than the February 2020 level. And although consumption of durable items edged slightly higher in January (0.4%M/M), the recent slump in consumer confidence – with households’ willingness to buy durable goods falling to its lowest in a year – suggests that such spending will fall back over coming months too.

Of course, part of the story behind the subdued consumption recovery reflects the persisting weakness in labour incomes. And tomorrow’s earnings data are likely to confirm that wage growth remained negative in January. While this will in part be due to lower overtime earnings as pandemic restrictions were reintroduced, underlying wages will also have remained weak (in January growth stood was unchanged at just 0.2%Y/Y). Among other Japanese data due this week, tomorrow’s economy watchers survey is also likely to confirm a further drop in household-related demand in February (from an eight-month low in January), to leave the headline sentiment index similarly at its lowest since August. Updated Q4 GDP numbers (Wednesday) are likely to point to a modest upwards revision to the 1.3%Q/Q growth initially estimated. But this return to positive territory seems likely to be short-lived – indeed, the government’s quarterly business sentiment survey (Friday) is expected to flag the likelihood that the economy fell back in the first quarter of the year. In terms of inflation, the goods PPI numbers for February are due Thursday.

Chinese export growth slows slightly at the start of 2022; February inflation set to remain weak
Chinese trade report today suggested that in the first two months of the year, growth in exports slowed slightly from the end of last year as the latest pandemic wave took its toll. Admittedly, exports were still up a solid 16.3%Y/Y, but this was down from an increase of 20.9%Y/Y in December and likely flattered by a low base a year earlier. Meanwhile, imports rose 15½% compared with January and February last year. And these were also likely boosted by price effects. Overall, the cumulative trade surplus for January and February stood at $115.9bn. But the trade surplus is likely to ease back over coming months, with a high base a year earlier expected to see export and import growth slow too. Looking ahead, Wednesday will bring the latest inflation figures for February, with headline CPI expected to be unchanged at just 0.9%Y/Y, while the headline PPI rate is forecast to have moderated further last month by ½ppt to 8.6%Y/Y, which would mark the softest annual pace since last April.

Euro area survey to provide initial snapshot of sentiment after the invasion; German factory orders firmer at the start of the year
A somewhat quieter week than of late for economic data will today bring arguably the most insightful release, with the euro area Sentix investor confidence survey for March. Having been conducted between 3-5 March, this will be the first survey to reflect sentiment after Russia’s invasion of Ukraine and seems bound to report a marked deterioration in both the current perceptions and expectations for the outlook. The Bank of France’s business survey and economic update (due Friday) will similarly reflect developments since the conflict intensified and seem likely to signal significant concerns about recent events.

For what it’s worth, however, this morning’s German factory orders data provided an upside surprise. In particular, new orders rose 1.8%M/M in January following upwardly revised growth in December (3.0%M/M). As such, they were more than 7% higher than a year ago and almost 12% higher than pre-pandemic level. Admittedly, some of this strength reflected major orders from overseas – new orders from non-euro area countries jumped 17%M/M, which pushed total foreign orders up by 9.4%M/M. When excluding major orders, overseas orders were up just 1.5%M/M. And overall orders excluding major items were up a more modest 0.8%M/M. In terms of tomorrow’s industrial output releases, the manufacturing turnover numbers were more encouraging, up for the fourth consecutive month and by 1.8%M/M, to leave it just 0.7% below the pre-pandemic level. As such, risks to the consensus forecast increase in German IP of 0.5%M/M looked to be skewed to the upside.

Looking ahead, as well as the German data, we’ll also get industrial production figures from Spain tomorrow and Italy on Wednesday. Updated euro area Q4 GDP and employment numbers (also tomorrow) will include a detailed expenditure breakdown for the first time, which is likely to confirm that growth slowed sharply to 0.3%Q/Q from 2.3%Q/Q in Q3 due principally to weakness in household consumption, which was suppressed by the latest wave of coronavirus. Other data from the region due include final German and Spanish CPI numbers for February on Friday.

UK GDP report for January a key interest ahead of next week’s MPC meeting
Ahead of the BoE’s MPC meeting on 17 March, Friday’s monthly GDP report for January will be of most interest. Having held up relatively well in December despite the latest pandemic wave, high frequency data suggest that private sector services activity moved broadly sideways at the start of the year. But with retail sales in January rising 1.9%M/M, and a modest pickup in manufacturing output also anticipated, we expect to see GDP growth of 0.2%M/M in January, reversing December’s decline of the same amount. That would leave overall output up more than 9%Y/Y and a touch above its pre-pandemic level. Friday will also see the release of January trade data. Ahead of this we will get February’s BRC retail sales monitor (tomorrow), the REC/KPMG report on jobs and the RICS residential survey (Thursday).

US CPI inflation likely to rise to a new 40-year high
The key US data release in the coming week will be February’s CPI report on Thursday. Energy prices accelerated last month and food prices remained under upwards pressure. So Daiwa America’s Mike Moran expects consumer prices to have risen 0.7%M/M, a touch below the Bloomberg consensus, but just above the average for the past year. If Mike’s right, the annual inflation rate will jump to 7.8%Y/Y, the highest for more than four decades. And against the backdrop of strong demand, rising residential rents and supply-side disruptions, this release is likely to confirm a further widening of price pressures – indeed, core prices are forecast to have risen 0.5%M/M, to be almost 6½% higher than a year earlier.

Ahead of this release, the US data-flow will bring consumer credit figures for January (Monday), as well final trade numbers for the same month (Tuesday) – the flash release reported a widening of $7.2bn in the goods trade deficit to a new record high ($107.6bn), reflecting a record value of imports and a drop in the value of exports, while the services surplus might well have eased slightly due to the Omicron-related cooling in travel and tourism at the start of the year. Finally, the preliminary University of Michigan’s consumer sentiment survey (Friday) is expected to have fallen further in February to its lowest reading since 2009 as households were increasingly concerned about surging gasoline prices and rising prices of groceries, as well as recent developments with the Russian invasion. 

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