Decline in Japanese IP was steeper than expected

Emily Nicol

Japanese IP falls sharply in October, raising doubts on a rebound in GDP in Q4
Japan’s industrial production figures fell short of expectations in October, adding further doubts about a return to positive GDP growth this quarter. In particular, manufacturing output fell for the second successive month and by a steeper-than-expected 2.6%M/M. The weakness was driven by output of production machinery (-5½%M/M), chemicals (-5%M/M), semi-conductor equipment (-21%M/M) and passenger cars (-6½%M/M), although the latter was more than offset by a jump production of auto parts and buses. While firms were forecasting a rebound in production this month and next, ongoing supply disruption from persisting Covid lockdowns in China and weak domestic and external demand will continue to limit any potential near-term recovery.

Chinese PMIs point to very weak GDP growth in Q4
Certainly, today’s Chinese PMIs offered a particularly bleak assessment of conditions, suggesting no letup in the downwards economic trend in November. In particular, the manufacturing output index fell a further 1.8pts to 47.8, signalling the steepest contraction in production since April, with new orders still declining sharply and business expectations for the year ahead slumping to the lowest since February 2020. But the weakness in the non-manufacturing survey was striking too, with the headline activity index down for the fifth consecutive month to 46.7, the second-lowest level since the start of the pandemic, with a further sharp contraction in new business too. Overall, the composite PMI (47.1) was trending so far in Q4 more than 3½pts below the Q3 average and even lower than in Q2 when GDP fell more than 2½%Q/Q.

Flash euro area inflation expected to have fallen back on lower energy prices
The data highlight in the euro area today will be the flash inflation estimate for November. While this morning’s French figures came in a touch firmer than expected, with the headline HICP rate unchanged from October at 7.1%Y/Y, German and Spanish inflation fell back on lower energy prices, by 0.3ppt to 11.3%Y/Y and 0.7ppt to 6.6%Y/Y respectively. And there was a significant downwards surprise from today’s Dutch data, with headline inflation down a whopping 5.6ppts to 11.2%Y/Y. And so, in the absence to an upside surprise to Italian inflation, risks to the euro area estimate appear skewed to the downside. On balance, we expect headline euro area inflation to fall 0.5ppt to 10.1%Y/Y, due principally to lower energy inflation, while core inflation is expected to have moved sideways at 5.0%Y/Y.

UK shop price inflation jumps to a new series high
According to the BRC, UK shop price inflation jumped again in November, as retailers continued to pass on some additional cost burdens amid ongoing supply-side pressures and significant energy expenses. This survey suggested that prices rose a further 0.9%M/M, to leave the annual inflation rate up 0.8ppt to a series-high 7.4%Y/Y. Food inflation rose a further 0.8ppt to 12.4%Y/Y, with non-food inflation up almost 5%Y/Y, with the BRC noting particularly high increases in prices of sports and recreation equipment. So, with today’s release implying a further squeeze on already exceptionally tight household budgets, consumer spending seems bound to be extremely depressed this quarter.

Focus in the US to be on Fed Powell’s speech for policy hints; revised Q3 GDP and goods trade figures also due
Attention in the US today will be firmly on Fed Chair Powell’s keynote speech on the economic outlook, inflation and labour market, for any further hints into the likely pace of tightening at the Fed’s final policy-setting meeting of the year. In terms of data flow, updated Q3 GDP figures are expected to confirm a return to positive growth, with risks to the initial estimate of 2.8%Q/Q annualised skewed slightly to the upside on firmer consumer spending. The advance goods trade numbers for October are expected to report a slight narrowing in the deficit as the decline in the value of imports exacerbated by the drop in petroleum prices will likely exceed the drop in exports. 

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