German industrial production surges in January

Chris Scicluna
Emily Nicol

Economy watchers remain downbeat about Japanese current conditions
Today’s Japanese Economy Watchers survey predictably suggested that activity continued to contract in February, as economic activity remained impacted by the latest pandemic wave and associated restrictions. Indeed, having fallen in January by the most (-19.6pts) since the 2011 Great East Japan Earthquake and Tsunami, the headline current conditions index fell a further 0.2pt last month to 37.7, a thirteen-month low. And there was a further weakening in household- and non-manufacturing-related demand. While the outlook index reported a modest increase, by 1.9pts to 44.4, it too remained firmly below the key-50 level implying “improving” conditions. And while respondents expect a modest recovery in due course, there remained concerns about rising prices, not least associated with the conflict in Ukraine.

Jump in Japanese wage growth likely to prove temporary
Japan’s latest labour earnings data beat expectations at the start of the year. In particular, total wage growth accelerated 1.5ppts to 0.9%Y/Y, an eight-month high. Admittedly, this principally reflected ongoing solid growth in overtime earnings (4.4%Y/Y) as firms attempted to make up for lost production caused by supply shortages – indeed, the number of overtime hours worked rose on average by 3.3%Y/Y in January, with the rate of growth double that in the manufacturing sector. But this was also likely flattered by a low base a year ago, as was the near-7 ½%Y/Y rise in bonus payments. There was, however, also a modest uptick in underlying wage growth in January, by 0.3ppt to 0.4%Y/Y, similarly an eight-month high. But when adjusting for inflation, real wages merely moving sideways compared with a year earlier, admittedly an improvement on the 1.5%Y/Y decline recorded in December. Moreover, in addition to the usual regular revisions (which are often skewed to the downside on the inclusion of non-regular workers in the final release), January’s wage numbers could be revised down further next month due to sampling and base-year adjustments – indeed, MHLW has suggested that the base year change may subtract 0.3ppt from January’s headline wage growth.

German industrial production surges in January boosted by construction output
As suggested by yesterday’s turnover data and various survey indicators, German industrial production grew vigorously at the start of the year as supply bottlenecks appeared to ease somewhat. Indeed, growth of 2.7%M/M was the strongest in fifteen months. Moreover, given favourable revisions to the estimates for prior months, the surge at the start of the year also represented the fourth successive month of industrial sector growth. But while the level was 3.5% above the Q4 average, it was still some 3.0% below the pre-pandemic level in February 2020. Growth in January was relatively broad-based with increases in production of all main categories of goods – capital (1.2%M/M), intermediate (0.3%M/M) and consumer (4.0%M/M) alike, so that manufacturing and mining output was up 1.3%M/M. Nevertheless, production of machinery and equipment (9.9%M/M) stood out as particularly strong, while output of autos fell back for the first month since August (-3.1%M/M). Moreover, the overall growth rate was flattered by an exceptional rebound in construction output, up an extraordinary 10.1%M/M on unseasonably mild weather following a revised drop of 4.0%M/M in December.

As we noted yesterday, survey and high-frequency data point to a further increase in factory output in February. And the high level of orders and backlogs, as well as the low level of inventories in the sector, would normally point to ongoing expansion further ahead too. However, the sudden renewed tightening of supply bottlenecks due to the disruption to supplies of key inputs from Ukraine and Russia is already impeding production in certain sectors, including autos. And given the additional adverse shock to energy and commodity prices, the outlook for Q2 and beyond currently looks weak.

Euro area Q4 GDP detail to confirm that slowdown was mainly due to household spending
Euro area Q4 GDP and employment numbers are also due today and will include a detailed expenditure breakdown for the first time. GDP growth in Q421 slowed sharply to 0.3%Q/Q from 2.3%Q/Q in Q3 as the latest wave of coronavirus weighed particularly on household consumption while construction investment was also soft. This morning will also bring Italian retail sales figures for January.

UK retail sales survey signals ongoing growth in February, but outlook appears gloomy
The BRC retail sales monitor published overnight suggested that the UK high street saw continued sales growth in February, with sales up in February by 6.7% compared to a year earlier, when non-essential stores were closed due to pandemic containment measures. So, while sales were impeded by stormy weather conditions towards the end of the month, they were still some 4½% higher than the pre-pandemic level in February 2020. Within the detail, demand for household-related goods, as well as clothing and jewellery, was reportedly strong.

But the BRC survey’s measure of sales growth seems bound to have been flattered by the recent surge in prices. And given the further deterioration in the inflation outlook, and National Insurance Contributions set to rise along with household energy bills, the near-term outlook for the UK high street looks increasingly gloomy. Indeed, with the GfK consumer confidence indices recently taking a marked turn for the worse, the IGD Shopper Confidence Index has now fallen to its lowest since the series began in 2013. And credible forecasts published this morning by the Resolution Foundation suggested that typical real non-pensioner household incomes in FY22/3 could fall by 4%Y/Y or more, with a further drop of 2% expected in FY23/4, such that the period from FY19/20 to FY24/5 would represent the worst parliament on record for income growth.

Small business sentiment and external trade the US data focus today
Today will bring a handful of US economic data of note, including the NFIB small business survey for February – which will likely suggest that the firms surveyed remain relatively downbeat – as well as the final trade and wholesale reports for January. According to the preliminary trade data, the goods trade deficit blew out by $7.1bn to a record high of $107.6bn. And while services trade might have fared a little better, Daiwa America’s Mike Moran cautions that the widening in the deficit in January likely potentially augurs a large negative contribution to GDP growth from net exports in Q1.

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