Japanese wages miss expectations

Chris Scicluna
Emily Nicol

Japanese wages miss expectations despite further pickup in scheduled earnings growth
Labour cash earnings in Japan rose 1.0%Y/Y in May, some ½ppt below the median forecast on the BBG forecast, following (downwardly revised) growth of 1.3%Y/Y the prior month. Admittedly, there were some positive developments in the detail, with scheduled earnings accelerating 0.2ppt to 1.2%Y/Y, the second-highest rate since the 1990s, as the labour market continued to tighten (the job-to-applicant ratio rose to a two-year high of 1.24 that month). Earnings were also boosted by a surge in overtime payments (up 5.5%Y/Y, the strongest rise in ten months, with overtime payments for part-timers up more than double that rate). So, the disappointment came from bonuses, which fell 7.0%Y/Y, the most in sixteen months, following strength earlier in the spring.

Big drop in real wages helps explain rising unpopularity of BoJ policy stance
While growth in regular labour earnings was stronger, it remains well below rates that might be consistent with achievement of the BoJ’s inflation target over the medium term. Moreover, it also meant that total real cash earnings fell sharply in real terms for the second successive month, and by a steeper 1.8%Y/Y, the most since the first wave of Covid-19 almost two years’ ago. That helps explain why the BoJ’s current monetary policy is increasingly unpopular with the general public, with a Nikkei poll last month suggesting 46% would like it to end and only 36% are in favour.

Japanese services PMI at 3rd-best on series despite downwards revision, composite PMI unsurprisingly consistent with a return to positive GDP growth in Q2
Despite the higher cost of living, today’s final Japanese services PMIs for June remained consistent with a return to positive growth in the sector in Q2, supported of course by the lifting of pandemic restrictions. Admittedly, the headline activity index was revised a touch lower from the flash release, although at 54.0 it was still 1.4pts higher on the month and the third-highest since the series began. Indeed, over the second quarter as a whole, the activity PMI was almost 5½ pts higher than the Q1 average. While there was a modest easing in the new business component on the month, at 53.1 it signalled steady growth. And firms in the sector were the second most optimistic about business expectations in the year ahead in the survey’s history. For now at least, the survey also suggested that services firms appeared more willing to pass on some of their higher input costs to consumers – indeed, the prices charged PMI rose 1.3pts to 53.5, the most since October 2019 when the consumption tax was last hiked.

Overall, given persisting challenges in the manufacturing sector, the increase in the composite PMI in June was less pronounced, although it was still up 0.7pt on the month at 53.0, a seven-month high. And the quarterly index was 3.5pts higher than the Q1 average at 52.1, implying a return to moderately positive GDP growth in Q2.

French manufacturing output ends losing streak with modest uptick up in May as car output rises to highest level since December
Following three successive monthly declines, French manufacturing output rose in May. But the increase of 0.8%M/M following a revised drop of 0.5%M/M in April left it still below the levels in the first two months of the year, and indeed still a little more than 5% below the pre-pandemic level in February 2020. Perhaps encouragingly, the production of motor vehicles grew for the second successive month (up 15.3%M/M in May after growth of 3.8%M/M the prior month to reach its highest level since December, albeit still more than 17% below the pre-pandemic level). Growth in other components was, unsurprisingly, typically more moderate, e.g. output of machinery and equipment was up 0.6%M/M after a larger drop in April. But production of coke and refined petroleum was up a steep 5.9%M/M. Output of consumer durables was up 7.1%M/M, while growth in intermediate (0.8%M/M) and capital goods (1.3%M/M) was less vigorous. And, with food and drink production in reverse on supply woes, output consumer non-durables dropped slightly (-0.3%M/M).

French industrial production still set to subtract from GDP growth in Q2
Meanwhile, as nuclear-generated power remained extremely subdued by recent standards, energy output dropped 4.4%M/M to the lowest level since the first wave of Covid-19 in April 2020. But other utilities were stronger, and construction output grew for a second successive month. So, overall industrial production was unchanged on the month in May. That, however, left the average level of overall production in the first two months of Q2 down a little more than 1.0% from the Q1 average, suggesting that the sector subtracted from GDP growth last quarter.

Final euro area services PMIs to confirm a notable loss of momentum at end of Q2
We will shortly get the final euro area services PMIs for June. The flash survey reported a marked decline in the headline activity index, by 3.3pts to 52.8, with firms reporting a notable slowdown in new business too, with the relevant index down to 51.9, similarly a fourteen-month low. The flash German and French activity PMIs also fell sharply, by 2.6pts to 52.4 and 3.9pt to 54.4 respectively. And while the monthly decline was softer than the euro area average, the headline Spanish activity PMI – just published – fell 2.5pts to 54.0, the second-lowest reading in fourteen months. While Spanish services firms suggested that commercial activities and advertising had received a boost, and the tourism sector is having a better year, respondents also cited some negative impact from higher inflation on budgets. And new export business was reportedly rising only modestly. Moreover, with persisting inflation seen as a potential restraint on activity for a while to come, confidence about prospects for the year ahead fell to a twenty-month low in June.

UK new car sales have worst June since 1996; final services PMIs likely to be consistent with negative GDP growth in Q2; BoE Financial Stability Report to be published
According to reports, preliminary SMMT data for registrations suggest that new car sales maintained their woeful run in June. Indeed, with demand weighed by record-low consumer confidence and production impeded by supply-chain challenges, new car registrations fell about 24%Y/Y to the lowest level for the month since 1996. And that left sales in the first half of the year down 12%YTD/Y to about 800k, the second-lowest level in three decades, only beating the Covid-afflicted sales of H120 over that period. The full SMMT car registration data will be released later this morning, as will the final UK services and composite PMIs for June. The flash services activity index moved sideways at 53.4, the softest reading since February 2021. And given the downwards revision to the manufacturing output PMI, the composite PMI is likely to have fallen to its lowest reading for two years, below the flash reading of 53.1, further supporting our forecast that UK GDP contracted in Q2.

Beyond the UK economic data, the BoE will publish its Financial Stability Report this morning. And external MPC member Silvana Tenreyro – who joined the internal MPC members in voting for a hike in Bank Rate of 25bps last month – will speak publicly on monetary and fiscal policy interactions, a topic currently relevant for the outlook for sterling rates after the government enacted a budgetary U-turn in May by offering additional support to households to cope with rising energy bills.

Final US factory orders data for May due; shipments in preliminary release consistent with negative contribution to GDP growth from equipment spending so far in Q2
After yesterday’s US holiday, a relatively quiet day for US economic data will bring the full May factory orders report. According to the preliminary data, the upward drift of durable orders of recent months was maintained, rising 0.7%M/M and in excess of the (then) BBG consensus forecast of 0.1%M/M. Orders excluding transportation also rose 0.7%M/M. But April results for total orders and bookings excluding transportation were both revised slightly lower. Orders for non-defence capital goods excluding aircraft, which provide insight into business capital spending plans rose 0.5%M/M, which are colleagues in Daiwa America judge most likely translated to a decline in real terms. And they also interpret the shipments data to suggest a negative contribution from equipment spending to GDP growth so far in Q2.

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