German IP up, but set to subtract from GDP growth in Q2

Chris Scicluna
Emily Nicol

BoJ consumption activity index points to solid rebound in spending in Q2
As Japan’s economy continues to normalise following the lifting of pandemic restrictions, today’s BoJ consumption activity indices – that provide the best timely guide to the national accounts measure of consumption – reported a further increase in spending in May as the recovery in expenditure on services continues. Overall, the real consumption activity index rose for the third consecutive month, and by 0.7%M/M, to leave it trending in the first two months of Q2 some 2.3% higher than the Q1 average. With prices higher, the nominal consumption activity index up 1.1%M/M in May and trending 3.4% higher so far in Q2.

Services consumption aided by easing of restrictions, spending on durable goods weaker
The recovery was unsurprisingly led by services activity, which also rose for the third successive month (1.3%M/M in real terms) to be up more than 4½% compared with Q1. Meanwhile, consumption activity related to non-durable goods in May (1.7%M/M) more than reversed the drop in April, but was merely unchanged from Q1. And there was a substantial decline in durable goods consumption, down 6.1%M/M, the most since September 2021, to leave it trending some ½% lower than the Q1 average.

Of course, this performance is similar to trends seen in other major economies following the reopening of the services sector. And, like elsewhere, there has also been a marked deterioration in Japanese consumer confidence over recent months, falling in June to its lowest level since January 2021, with the survey index for households’ willingness to make major purchases the second lowest on the series (dating back to the early 1980s). So, while consumption seems bound to provide a notable boost to Japanese GDP growth in Q2, with household budgets being increasingly squeezed by higher prices, the spending outlook for Q3 remains more uncertain.

German IP up for second month in May but still set to subtract from GDP growth in Q2
This morning’s German industrial production data for May came in a touch softer than expected, although growth in overall of IP of 0.2%M/M at least represented the second successive month of increased output. That, however, still left production about 5% below the pre-pandemic level. Moreover, given the steep drop in March, the average level of IP in the first two months of Q2 was still about 1.3% below the Q1 average, strongly suggesting that the industrial sector subtracted from GDP growth last quarter. Within the detail, manufacturing output grew 0.6%M/M to be trending more than 1½% below the Q1 average. Boosted by a second successive month of firm growth in motor vehicle output (up 5.9%M/M following double-digit growth in April, albeit leaving the level still more than 18% down from before the pandemic), production of capital goods rose 2.2%M/M. But production of consumer (-0.9%M/M) and intermediate (-0.4%M/M) items fell back. Beyond the factory sector, construction output rose 0.4%M/M, but was trending about 2.0% below the Q1 average. And after a wind-assisted surge in generation in April, energy output dropped a whopping 5.8%M/M but was trending 1.0% above the Q1 average.

ECB account to watched for any further policy clues
The release of the account from the ECB’s 9 June policy-setting meeting at lunchtime today will be watched, although it remains to be seen if it will provide any additional noteworthy information on the Governing Council’s plans for monetary policy normalisation. In particular, the Governing Council pre-committed to increasing its main interest rates by 25bps in July. And it made clear that, unless the medium-term inflation outlook in its updated projections is judged to have improved then, it will raise its key rates by a larger amount – presumably 50bps – in September. It also stated that "a gradual but sustained path of further increases" is likely thereafter, raising the likelihood of at least 50bps – and perhaps 75bps or more – of hikes in Q4 and additional tightening in 2023. Of course, in her press conference following that meeting, President Lagarde failed to offer detail on the Governing Council’s intentions with respect to fragmentation risks. But faced with sharply rising spreads on BTPs and other Southern European bonds, the subsequent ad hoc policy meeting on 15 June saw the Governing Council agree to commission plans for a new anti-fragmentation policy tool.

FOMC minutes reaffirm Fed’s aggressive path of tightening but offers no major insights; May’s trade report due today
The minutes from the June FOMC meeting released yesterday evening predictably did not contain any major revelations, but they nevertheless supported the view that the Fed is on an aggressive path of tightening, with the inflation outlook judged to warrant a restrictive stance of policy. FOMC members appeared to remain focused on inflation expectations, with a further pickup representing a significant risk to a return to the 2% target. But they were also reportedly somewhat encouraged that long-term expectations of forecasters and market participants were still consistent with the Fed’s objective. While the minutes offered no further insight into the preference for an increase in rates of 50 or 75bps at the 26-27 July meeting, recent commentary from several policymakers suggest that they are leaning towards a 75bps hike. FOMC members Waller and Bullard are scheduled to speak today.

In terms of US data, today brings the full trade report for May. The preliminary goods trade release brought a modest improvement in the deficit, narrowing by $2.4bn to $104.3bn. While month to month movements in the the services surplus has been erratic over the past year, our colleagues in the US think that it could also make a small positive contribution to the trade balance in May. Ahead of Friday’s employment report, today will also bring the weekly claims numbers and Challenger job cuts figures for the past month.

UK politics remain in focus as PM Johnson tries to cling on to office for a bit longer
Focus in the UK will remain firmly on politics. Despite yesterday’s exodus of ministers and other government members from office – which has continued this morning to bring the tally of departures to 53 – Boris Johnson continues to desperately cling on as Prime Minister. But with estimates suggesting that no more than 65 of the Conservative party’s 357 MPs now support him; the impossibility of filling all of the new vacancies in government; the likelihood that the rules governing the party’s leadership challenges will be changed early next week to allow a snap new vote; and a constitutional convention suggesting that the Queen could refuse any request from him to dissolve Parliament if an alternative PM could be found to govern with a reasonable majority (presumably any new Conservative leader), Johnson’s time in office seems bound to be up imminently. The likely identity of his successor – and thus the policy path likely to be pursued – remains highly uncertain, however.

UK data releases are thin on the ground today, with just updated labour productivity figures for Q1 due, as well as the BoE’s decision Makers Panel survey results. Separately, hawkish external MPC member Catherine Mann is due to speak at a forum on the rise of inflation and current global monetary policy issues.

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