German IP surprised on the upside, while retail sales extended downwards trend

Emily Nicol
Chris Scicluna

Japanese Economy Watchers survey points to a moderate recovery underpinned by stronger household-related demand
While economic data have suggested a mixed performance in Japanese activity at the start of the year – e.g. a pickup in household consumption but a slump in industrial production – today’s Economy Watchers survey suggested that Japan’s economy was recovering moderately in February. In particular, the headline current conditions diffusion index (DI) rose for the first month four and by 3.5pt to 52.0, the highest reading since June to be comfortably higher than the pre-pandemic long-run average (45.0). The improvement was underpinned by a surge in food & eating-out related demand, with the respective DI up 11.3pts to 60.2, with the services DI up to a seven-month high too. And while still below the key-50 ‘improving’ level, the corporate-related demand DI rose for the second successive month, by 1.9pts to 48.7, a nine-month high and similarly above the long-run average (46.1). Looking ahead, economy watchers expected a gradual recovery to continue, although respondents remained concerned about the impact of higher prices.

German IP beats expectations as construction and energy-intensive output rebounds but trend remains broadly sideways
This morning’s German economic data largely beat expectation with IP in January in particular much stronger than expected. And while retail sales in January failed to deliver the expected growth, that principally reflected an upwards revision to the December figures. Indeed, with both retail sales and IP at the end of last year revised up, this morning’s data raise the possibility of an upwards revision to German GDP in Q4, which is currently estimated to have dropped 0.4%Q/Q.

Within the detail, the jump in industrial production in January of 3.5%M/M was more than 2.0ppts above the consensus forecast, while the drop in December (-2.4%M/M) was not as steep as previously estimated. Given the weakness over prior months, however, IP was unchanged on a 3M/3M basis and down 1.2%Y/Y. Growth in January was flattered by an extreme jump of 12.6%M/M in construction, which followed a drop of 7.5%M/M in December, but still left it down 1.3%3M/3M. But manufacturing and mining output also beat expectations, rising 1.9%M/M to more than reverse the drop in December and be up 0.4%3M/3M.

Perhaps encouragingly given the sharp retrenchment over prior months, growth in factory production was led by the energy-intensive subsectors, where output rose 6.8%M/M with chemical products up 9.8%M/M and metals up 5.0%M/M. However, energy-intensive production was still down a steep 13.2%Y/Y. Within the other detail, output of electronic equipment also started the year on the front foot, rising 7.1%M/M, but motor vehicles reversed 5.2%M/M and pharmaceuticals plunged 12.9%M/M.

German real retail sales extend downwards trend to reach lowest level in almost 2 years
Despite a marked upwards revision to the December figure, which meant that real retail sales dropped ‘just’ 1.7%M/M at the end of the year compared to the initial estimate of 5.7%M/M, the picture for activity on the German high street remained gloomy. Retail sales edged down 0.3%M/M in January, also thus down 6.9%Y/Y and 1.7%3M/3M, and on track for a fourth successive quarterly drop. Indeed, the retreat at the start of the year also left retail sales volumes at the lowest level in almost two years, more than 10% below the pandemic-era peak in June 2021 and also 0.6% below the pre-pandemic level at the start of 2020. With prices having dropped at the start of the year, sales in nominal terms fell a steeper 0.7%M/M but were still up 2.8%Y/Y.

Looking ahead, today will also bring the final release of euro area GDP and employment figures for Q4. Given the 0.2ppt downwards revisions to German and Spanish GDP and significant (more than 3ppts!) downwards revision to the Irish GDP estimate, the minimal growth initially estimated in Q4 (0.1%Q/Q) seems likely to be revised away, with a non-negligible chance of a negative print. This morning’s upwards revisions to the German IP and retail figures for December confuse matters, however. Today’s euro area release will include the official expenditure breakdown, which seems likely to confirm a slump in private domestic demand.

UK survey suggests a further moderating in jobs growth, but still strong wage pressures
Given the BoE’s concerns about notable recent strength in wage growth, today’s REC/KPMG report on jobs offered mixed messages about labour market conditions in February. Overall, recruitment consultancies suggested a further loosening in the jobs market, reporting a fifth consecutive drop in new permanent hires last month, with only modest growth in temporary staff too, as firms remained cautious amid ongoing economic uncertainty. And while there was a pickup in the number of permanent vacancies, this remained softer than the historical average. Admittedly, staff availability for permanent roles again improved slightly last month, with some recruiters attributing this to a recent increase in redundancies. However, candidate shortages persisted. And the survey indicator for growth in starting salaries for new permanent staff edged slightly higher in February from the 21-month low recorded in January to remain well above the long-run average. Beyond the economic data, external MPC member Swati Dhingra – who in February voted to leave Bank Rate unchanged – is scheduled to speak this morning.

US trade and ADP employment reports
Ahead of Friday’s US payroll figures, today will bring the private sector ADP employment report, which is expected to show an increase of 200k in February. We note, however, that this survey has recently been a poor guide to the official numbers. This afternoon will also bring the latest job openings numbers for January, as well as the full trade report for the same month. The advance goods trade figures revealed a widening in the deficit by $1.8bn to $91.5bn, while the service surplus could ease after three consecutive increases pushed it to the top of the range of the current expansion.

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