Japanese flash PMIs slip into contractionary territory

Chris Scicluna
Emily Nicol

Japanese PMIs flag increasing economic headwinds over the summer period
Contrasting with last week’s Reuters Tankan survey – that signalled a modest improvement in Japanese business conditions in August – today’s flash PMIs offered a more downbeat assessment of the economy over the summer period, with seemingly little improvement on the horizon too. Indeed, the composite output PMI fell for the second successive month in August, with the 1.3pt drop taking the index to 48.9, a six-month low and firmly in contractionary territory.

The weakness was broad-based. The manufacturing output PMI was down for the fifth consecutive month, by 1.5pts to an eleven-month low of 48.3, while the services activity index fell a further 1.1pts to a six-month low of 49.2 to be trending so far in Q3 some 2.7pts lower than the Q2 average. And while there was a further modest improvement in supplier delivery times related not least to China’s relaxation of Covid restrictions, manufacturers appear to be facing a further drop in demand, with the PMIs suggesting that new factory orders in August declined by the most in almost two years, while services firms saw new business drop too despite a slight pickup in tourism.

As such, S&P Global noted that weaker demand and increasing economic headwinds had forced firms to reduce slightly their planned price increases to consumers, with the composite output price PMI easing ½pt to 54.5, nevertheless still comfortably in positive inflationary territory and well above the long-run average (46.9).

Underlying price pressures in Japan continue to broaden, with trimmed mean CPI at a series high
Last week’s CPI inflation figures saw headline Japanese inflation in July rise to 2.6%Y/Y, its highest since October 2014. But this again largely reflected energy and food price pressures. Indeed, when stripping out such items, the internationally comparable core measure of inflation stood at just 0.4%Y/Y, nevertheless up 0.2ppt on the month, more than 2ppts higher than January’s (policy-driven) low and the highest since the start of 2020. And the BoJ’s estimates of underlying inflation published today further illustrated a broadening of price pressures in Japan too. According to the BoJ, prices of roughly 73% of items in the CPI basket were higher than a year earlier, up from a little more than 50% in July 2021, and the highest share since the series began in 2000. And so, Japan’s trimmed mean CPI estimate jumped 0.2ppt to 1.8%Y/Y, the highest since the series began too. Admittedly, this still remains a long way below similar measures in the US (7.0%), euro area (7.0%) and UK (7.2%).

Flash euro PMIs and consumer confidence surveys set to flag increasing recession risks
Focus in the euro area today will be firmly on August sentiment indicators, including the flash PMIs and Commission consumer confidence index, for further insight to the risks that the economy is now slipping into recession. Given concerns about high inflation, supply disruptions, rising interest rates and slowing global demand, the PMIs seem likely to signal a further weakening in conditions in August, with the headline euro area composite output index probably falling further into contractionary territory from 49.9 in July. Signals from the German manufacturing sector seem likely to remain extremely downbeat as concerns about energy supply were compounded over recent weeks by fears about the implications of low water levels in the Rhine. However, a much better tourist season should maintain support for services in France and southern Europe. The Commission’s preliminary consumer confidence indicator is likely to remain at or below July’s record low level of -27.0, as households become increasingly concerned about their future financial situation amid higher inflation and rising interest rates.

UK flash PMIs to signal a further marked slowdown over the summer
The UK’s flash August PMIs will similarly likely flag growing recession risks. Having dropped in July for the third month out of the past four to 52.8 – roughly 3pts below the average in the first half of the year and implying the softest growth since February 2021 – the composite PMI is likely to fall further towards 50 in August reflecting a deterioration in both services and manufacturing. The CBI’s industrial trends survey for this month is also due this morning and will likely also point to a slowdown in manufacturing activity and a further deterioration in firms’ selling price expectations.

US flash PMIs and new home sales figures due
Like elsewhere, August flash PMIs are due from the US. These are forecast to report a deterioration in the headline manufacturing index but a rebound in the services activity index, albeit the latter is expected to merely return to 50.0, suggesting stagnation in the sector. Meanwhile, new home sales figures for July seem bound to be weak. Declines in the NAHB sentiment index and mortgage applications for a home purchase suggest that elevated mortgage interest rates are continuing to weigh heavily on the housing market. The expected decline in new home sales in July would be the sixth in the past seven months, pushing sales to a new low for the current expansion.

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