Japanese PMIs point to ongoing recovery

Chris Scicluna
Emily Nicol

Japanese flash PMIs point to ongoing recovery in June, department store sales flattered by timing of Covid restrictions
With Japan’s economy continuing to normalise following the lifting of pandemic containment measures and the easing of international travel restrictions, the flash services PMI released today implied the fastest pace of expansion in the sector since 2013. The headline activity index rose for the fourth consecutive month, by 1.6pt to 54.2, some 10pts higher than the trough in February to leave the quarterly average almost 5½pts higher than in Q1. Admittedly, the export orders component remained firmly in contractionary territory (45.9), although this should improve further as tourism resumes. Overall, firms were the most upbeat about the outlook for the year ahead since November.

Today’s survey, however, flagged ongoing difficulties in the manufacturing sector, with the output PMI declining ½pt to 51.0, a four-month low, as firms continued to cite supply-chain disruption relating to China’s lockdowns. But new orders remained subdued too, with the index falling into contractionary territory for the first time since September. Overall, given the dominance of the servicers sector, the composite PMI rose 0.9pt to 53.2, the highest since October 2017 and consistent with a solid rebound in GDP growth this quarter. And there were signs that firms were continuing to pass on higher input costs to consumers, with the composite output price PMI rising a further 1.4pt in June to 56.4, a new series high.

Today also saw the release of Japan’s latest department store sales figures for May. These reported a whopping increase of 57.8%Y/Y (80.6%Y/Y in Tokyo), but were clearly flattered by the timing of various pandemic restrictions, with stores in May 2021 either closed or operating with shorter hours. Summer discounting, the Golden Week holiday and improving weather, underpinned a notable improvement to clothing sales (80.6%Y/Y). Spending on big-ticket items also remained robust despite higher prices, while the return of some overseas visitors also provided a boost. But perhaps reflecting ongoing supply issues, the sales performance at electronic retailers continued to weaken. Overall, department store sales are expected to pick up modestly over the near term, although price increases will be a limiting factor.

Euro area PMIs to point to ongoing services recovery; but French INSEE flags a loss of retail optimism
Like in Japan, the main economic focus in the euro area today will be the flash June PMIs. Despite the further deterioration in consumer confidence, we expect the headline euro area services activity PMI to point to ongoing recovery as the sector continues to normalise after the latest pandemic wave and international travel picks up further. The manufacturing output index, however, is likely to imply still challenging conditions amid persisting supply constraints and elevated costs. Overall, the composite PMI is forecast to fall a little more than ½pt to close to 54, which would be the lowest level in six months albeit one still consistent with economic expansion.

At the country level, the flash PMI results for Germany are likely to point to relatively challenging conditions in the euro area’s largest member state, with the composite measure expected to fall to a six-month low of 53.0. In France, the somewhat stronger position of the services sector should maintain the composite PMI above that of its larger neighbour, perhaps close to 56.0 in June, although that would still be about 1pt lower than in May. This was broadly consistent with the French INSEE survey this morning, which reported that services firms were less optimistic than in May, with the respective index down 1pt to 108, some 6pts lower than November’s peak but nevertheless still above the long-run average (100). Retailers were also more downbeat about the outlook. Overall, the headline composite sentiment indicator fell 2pts to 104, the lowest since April 2021.

UK surveys to signal a further loss of momentum at the end of Q2
The flash UK PMIs are expected to suggest some further loss of recovery momentum at the end of the second quarter. In particular, the composite PMI is forecast to decline about ½pt to a 16-month low of 52.4. While these indices have recently given an exaggerated impression of the vigour of economic activity, the June figures should be weighed by the extra bank holiday that month. Similarly, despite the surprise pickup in retail sales in April, the latest CBI distributive trades survey is likely to point to weakening activity on the high street over the remainder of the second quarter given the increasing squeeze on household budgets from high inflation.

UK public borrowing exceeds expectations in May
UK net public borrowing (excluding public sector banks) came in above expectations again in May, reaching £14.0bn, £2.0bn above the median forecast on the Bloomberg survey and £3.7bn above the OBR’s forecast. The figure was the third highest for any May, down £4.0bn from a year earlier but £8.5bn above the level in May 2019 ahead of the pandemic. Compared with a year earlier, central government receipts were up £5.7bn, in part due to the government’s increase in National Insurance Contributions but also increased VAT receipts due to higher spending. Central government current was down £2.2bn from a year earlier, with the savings of £4.9bn in pandemic-related subsidies in part offset by an extra £3.1bn of debt interest payments due not least to the impact of high inflation on indexed-linked Gilts. The wider-than-expected deficit in May meant that cumulative net public borrowing in the first two months of the year reached £35.9bn, some £6.4bn greater than the OBR’s forecast. If such underperformance against the OBR projections continues over coming months, scope for the government to provide extra fiscal policy support for the weakening UK economy in the autumn Budget will be diminished.

US surveys expected to flag challenging conditions in the manufacturing sector
Like in the other major economies, the S&P Global flash June PMIs are also due from the US, and are expected to signal a loss of momentum at the end of the second quarter not least reflecting increased challenges in the manufacturing sector. The Kansas City Fed manufacturing activity index is also forecast to have declined to its lowest reading since 2020. In terms of Fed-speak, Chair Powell will repeat his monetary policy testimony before the House Financial Services Committee. 

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