German IP beat expectations in September

Emily Nicol

Sideways trend in German IP maintained in Q3, but output set to drop in Q4
At face value, this morning’s German IP data beat expectations, with real-terms production up 0.6%M/M compared to the median forecast on the Bloomberg survey of 0.1%M/M. However, revisions meant that the contraction in August was much deeper than previously thought at -1.2%M/M. And, looking through the monthly noise, growth in September merely extended the broadly sideways trend in play since the second half of 2021. Indeed, over Q3 as a whole, IP rose just 0.1%Q/Q. And production in September was still almost 6% below the pre-pandemic level in February 2020. Growth in September was led by manufacturing and mining output, which rose 0.7%M/M to be up 0.5%Q/Q in Q3, with capital goods up 2.9%Q/Q as supply chain disruption eased somewhat in the autos sub-sector. But shortages of raw materials and components continued to act as a restraint, particularly on production of consumer and intermediate items, which fell 0.5%Q/Q and 1.9%Q/Q respectively in Q3. And energy-intensive firms (e.g. metals and chemicals) continued to cut output aggressively (down 0.9%M/M in September to be almost 12% below the last year’s peak and down almost 5%Q/Q in Q3). With confidence extremely low, and domestic and external demand weakening, we expect German industrial production in all major sub-sectors to contract in Q4 and further in the New Year.

Later this morning, October’s construction PMIs for the region and the large member states, as well as the euro area’s Sentix investor survey for November, will provide further updates on sentiment in the fourth quarter.

Chinese exports unexpectedly decline in October; CPI inflation expected to ease as PPI turns negative
Today’s Chinese goods trade figures for the start of Q4 fell short of expectations raising doubts about economic momentum amid slowing global demand. Admittedly, the headline trade surplus rose in October to a three-month high ($85.2bn), but this reflected a drop in imports (-0.7%Y/Y) for the first time since August 2020 due to the recent decline in commodity prices as well as subdued domestic demand. But there was also an unexpected drop in exports in October (-0.3%Y/Y), as shipments fell to the US (-12.6%), Australia (-2.1%) and Germany (-10.9%). The data won’t have been flattered by a high base a year ago. But the near-term outlook remains clouded by a dark outlook for global demand. Looking ahead, focus in China will turn to Wednesday’s inflation figures, with headline CPI forecast to have fallen 0.4ppt to 2.4%Y/Y, which would mark a five-month low, and PPI inflation is expected to have slipped into negative territory for the first time since 2020.

Japanese consumption likely to have slowed as real wage growth continues to decline
In Japan, tomorrow’s wage numbers are expected to show that nominal growth moved sideways at an above-average 1.7%Y/Y in September, although given the pickup in inflation over recent months this would leave real wage growth firmly in negative territory (-1.8%Y/Y). Amid diminishing household purchasing power, tomorrow’s household spending and BoJ consumption activity indices might well report more subdued consumer expenditure at the end of Q3. The economy watchers and Reuters Tankan surveys (Wednesday) will provide an update on conditions at the start of Q4, while Friday will bring the latest goods PPI data for October.

Euro area retail sales to offer more insight into spending at the end of Q3
After the first estimate of euro area Q3 GDP a week ago, tomorrow’s retail sales numbers will provide further insight into consumer spending at the end of the quarter. While German sales surprised on the upside in September, any growth in aggregate euro area sales will be limited by households’ diminished purchasing power amid record high prices. Indeed, final German inflation figures for October (Friday) are expected to confirm that headline HICP inflation jumped 0.7ppt to 11.6%Y/Y reflecting a further surge in food prices.

UK GDP to have contracted in Q3, due not least to weaker consumer spending
Following last week’s very gloomy economic assessment from the BoE, all eyes in the UK will be on the first estimate of Q3 GDP and associated monthly output and trade figures for September on Friday. Not least reflecting the impact of the period of national mourning and additional Bank Holiday to mark the Queen’s funeral, as well as the weakening in demand amid high inflation, rising borrowing costs and heightened economic uncertainties, GDP is likely to have fallen in September for the third month out of four. So, in line with BoE staff estimates, we forecast GDP to have contracted by 0.5%Q/Q in Q3, weighed not least by consumer spending. And that would leave the UK the only G7 economy with output still below the pre-pandemic level.

US CPI inflation likely to have edged only marginally lower in October
Amid Fed Chair Powell’s hawkish tone at last week’s FOMC press conference, the data highlight of the week in the US will be Thursday’s CPI release for October. Having declined in the previous three months, by more than 11%, energy prices look set to have ticked higher last month, with food prices also seeing another brisk increase. As such, our colleagues in Daiwa America expect total prices to have risen by an above-consensus 0.7%M/M, which would mark the fastest increase for four months. And so the annual CPI rate is expected to have edged only marginally lower from 8.2% in September. With underlying price pressures continuing to broaden, the increase in core prices is expected to remain close to the 12-month average of 0.5%M/M, to leave the annual rate down just 0.1ppt from 6.6%Y/Y previously. Friday’s University of Michigan consumer survey will offer insights into households’ price expectations at the start of November. 

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