Japanese GDP returns to growth in Q2

Chris Scicluna
Emily Nicol

Japanese GDP returns to growth in Q2, at long last surpassing the pre-pandemic level in Q419 but remaining well below the pre-tax hike peak
Japanese GDP grew a rather underwhelming 2.2%Q/Q annualised (0.5%Q/Q) in Q2, following a pandemic-related pause in growth in Q1 (revised from a fall of 0.5%Q/Q ann.). So, it just about returned to the pre-Covid-19 level in Q419, a milestone that was passed a year earlier in the US and two quarters ago in the euro area (and remained 0.3% below its level in Q120). And the level of GDP was still 2.7% below the pre-pandemic peak in Q319, with just government spending and exports above that benchmark. So, with wage growth still tepid and inflation not expected to remain above target over the horizon, the BoJ won’t be overly impressed.

Japanese growth in Q2 was led by household consumption (4.7%Q/Q ann.) to be more than 1% above the Q419 level, amid greater opportunities to spending on services (5.6%Q/Q ann.) and stronger consumption of semi-durable goods too. Government spending provided further modest support last quarter, while non-residential investment boosted GDP growth for the first quarter in four, rebounding (5.8%Q/Q ann.) in Q2 but nevertheless remained almost 8% below the pre-tax hike level. And a further contraction in residential investment left it 14½% below the Q319 level and its lowest since Q310. Despite another quarter of solid export growth amid the gradual resumption in tourism, imports subtracted from GDP for the third consecutive quarter. And having provided a sizeable boost to growth in Q1, private inventories subtracted 1.7ppts from annualised growth in Q2.

Looking ahead, Wednesday brings July’s trade data as well as June’s machine orders figures, while Friday will bring national CPI inflation figures for July. Headline inflation is forecast to have risen 0.2ppt to 2.6%Y/Y, which would mark the highest reading since October 2014, boosted in part by stronger energy and food prices. But there are likely to be further hints of broadening underlying price pressures too, with the BoJ’s preferred core measure of CPI (excluding fresh foods and energy) forecast to rise 0.1ppt to 1.1%Y/Y, which would be the highest since 2015.

China’s economic activity data miss expectations prompting surprise rate cut
China’s economic activity data for July missed expectations, with policymakers’ concerns about the weakness, related not least to ongoing Covid restrictions and the adjustments in the real estate sector, prompting a surprise rate cut from the PBoC. Most notably, retail sales came in well below expectations, slowing 0.4ppt from June to 2.7%Y/Y (compared to the median on the BBG survey of 4.9%Y/Y), to be still down on a year-to-date basis (-0.2%YTD/Y). Industrial production rose 3.8%Y/Y (vs the BBG median of 4.3%Y/Y) to be up 3.5%YTD/Y. Fixed asset urban investment was up 5.7%YTD/Y while property investment was down 6.4%YTD/Y, with residential property sales down 31.4%YTD/Y and new home prices down for the eleventh successive month. While the surveyed jobless edged down again to a six-month low of 5.4%, the youth rate rose to a series high of 19.9%. In response, the PBoC cut its 1Y policy loan rate by 10bps to 2.75% and the 7-day reverse rate also by 10bps to 2.0%, both series lows. However, given the nature of the obstacles to growth in China, it’s doubtful that the monetary easing will give much of a boost.

UK inflation set to reach new high amid tight labour market despite weak demand
After Friday’s GDP report confirmed a slight contraction in Q2, several top-tier UK data releases are due this week, including the latest labour market report (tomorrow), July inflation figures (Wednesday) and retail sales for the same month (Friday). We expect to see ongoing tightness in the labour market with participation remaining well below pre-pandemic levels and so the unemployment rate still very low and probably unchanged at 3.8% in the three months to June. Regular wage growth is likely to have remained above 4%3M/Y, too high for the BoE’s comfort but still firmly in negative territory in real terms. Indeed, the headline CPI rate could rise 0.6ppt on Wednesday to an eye-catching 10.0%Y/Y, driven not least by an increase in the food component, as well as an uptick in non-energy industrial goods and services inflation. And we expect the core inflation rate to rise above 6.0%Y/Y. Finally, retail sales in July are likely to have dropped for the sixth month in the past seven as consumer confidence remains at a historically low level.

Euro area dataflow starts with ZEW survey tomorrow, and jobs figures Wednesday
In the euro area, after a quieter start to the week today, tomorrow’s Germans ZEW investor sentiment survey for August seems bound to suggest that confidence remains very low as concerns about near-term recession, possible disruption to energy supply and freight transport on the Rhine, as well as higher interest rates, persists. Equity and bond market movements over the past month, however, might point to a modest improvement in the expectations balance from July’s 30-year low on hopes that global inflation pressures are close to the peak, although the current conditions index might well decline further to the lowest in more than a year on recession concerns.

In addition, updated Q2 GDP data (Wednesday) should confirm the flash estimate of growth of 0.7%Q/Q, to leave output 1½% above the pre-pandemic level. This release will be accompanied by euro area employment figures, which are likely to report job growth for a fifth successive quarter to a new series high, albeit at the slowest rate over that period. While we will have to wait until 7 September for the official expenditure breakdown of GDP, tomorrow’s euro area goods trade figures for June will provide some further guidance on the contribution from net trade in Q2.

Final euro area inflation data for July (Thursday) are highly likely to confirm that the headline HICP rate increased 0.3ppt to 8.9%Y/Y, with core inflation also up 0.3ppt to 4.0%Y/Y, both series highs. While we know that the increase was caused by higher inflation of services, non-energy industrial goods and food, this release will also provide the more granular detail. German PPI numbers for July will follow on Friday.

US focus on retail sales, with Fed minutes, IP and housing data also due
In the US, the principal focus will likely be Wednesday, when July’s retail sales figures are due as well as the minutes of the Fed’s 27 July meeting when the Fed Funds Rate was hiked by 75bps for a second successive month. The latter might offer few clues as to whether the FOMC will hike by 50bps or 75bps next month. The retail sales figures, meanwhile, will be distorted significantly by relative price changes, with lower gasoline prices likely dominating to cause a drop in total sales that our US team expects to reach about 0.5%M/M. Ex-autos and gas, however, nominal sales seem likely to be higher (up 0.2%M/M) as higher prices offset the impact of lowest sales volumes.

Other US data due this week include July industrial production (tomorrow) which are expected to report modest growth in manufacturing and energy (the latter boosted by above-average temperatures), to leave total IP up 0.3%M/M, albeit merely reversing the decline in June. Housing market indicators will also be closely watched, with housing starts (tomorrow) and existing home sales figures (Thursday) likely to report a further marked drop amid waning demand and significantly higher mortgage rates.

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