German retail sales slumped in December

Chris Scicluna
Emily Nicol

French inflation up in January as expected, but core pressures appear a touch softer
Unlike yesterday’s big upside surprise from Spain, this morning’s flash French estimates of inflation in January in line with expectations. As in Spain, however, French inflation rose at the start of the year, although the 0.3ppt increase in the EU-harmonised measure to 7.0%Y/Y left it still 0.1ppt below the peak reached in October and November. And the national CPI measure rose just 0.1ppt to 6.0%Y/Y, similarly down on the autumn peak. The limited CPI detail revealed that the pickup in inflation was again driven by non-core pressures, with food inflation up 1.1ppts to a new high of 13.2%Y/Y while energy inflation rose a similar 1.2ppts to 16.3%Y/Y, reflecting the reduction in government support. In contrast, with inflation of services down 0.3ppt to 2.6%Y/Y, and the equivalent rate for manufactured products unchanged at 4.6%Y/Y, French core inflation looks to have softened somewhat at the start of the year. With the release of the German data, which were originally due today, now postponed to next week, tomorrow’s euro area figures could go either way, although a similar pattern to the French data (a modest increase to headline inflation but a decline in the core measure) would now not be a surprise.

French GDP avoids contraction thanks to big drop in imports as domestic demand falls
Ahead of this morning’s flash estimate of euro area Q4 GDP, the French data came in broadly in line with expectations, with growth of 0.1%Q/Q. That marked a slowdown of 0.1ppt from Q3, and left French GDP some 1.2% above the pre-pandemic level three years earlier. The detail of the data was very soft, however, with household consumption dropping a steep 0.9%Q/Q, the most since the lockdowns of Q1 last year. While fixed investment growth remained positive, it slowed 1.5ppts to 0.8%Q/Q, and so final domestic demand subtracted from overall GDP growth. And with the contribution from inventories also negative (-0.2ppt), it was only because imports (-1.9%Q/Q) dropped at a faster pace than exports (-0.3%Q/Q) that overall GDP growth was (marginally) positive. With yesterday’s extremely strong figure for Ireland (3.5%Q/Q) more than offsetting the weakness in Germany (-0.2%Q), and Spain also having maintained positive growth (0.2%Q/Q), the national data released so far point to modest growth in the euro area as a whole in Q4.

German retail sales slump in December as higher prices erode purchasing power
While Destatis yesterday attributed the weakness in German GDP in Q4 to household consumption, today’s German retail sales figures clearly illustrated the slump in spending on goods at the end of the year. Indeed, the volume of sales fell a much steeper-than-expected 5.3%M/M in December, the most since July 2021 and January 2007 before the pandemic, when Germany’s VAT rate was raised by 3ppts to 19%. This left sales down 2.7%3M/3M in Q4 and 6.4% lower compared with a year earlier as households’ purchasing power continued to be eroded by higher prices. Indeed, in nominal terms, sales were still up more than 4%Y/Y despite a drop of 4.8%M/M in December. It is worth noting, however, that December readings for German retail sales are typically subject to more significant revisions than in other months due to additional company reporting in due course.

Chinese PMIs surge at the start of the New Year led by services
Today’s Chinese PMIs suggested that the economy started the year with firm growth, as the relaxation of zero-Covid policy restrictions allowed a rebound in activity while the peak in the reopening wave of the coronavirus was reached in late December. The improvement was most striking in the services sector, where the headline activity index jumped 12.8pts to 54.4, the second-strongest reading for twenty months. And having fallen in December to its weakest since April 2020, the survey’s new business component implied a return to growth for the first time in seven months too. There was also a marked jump in the manufacturing output index, by 5.4pts to 49.8, suggesting broad stabilisation in the sector in January. The survey implied the fastest increase in new orders since July 2021 as well as a notable easing in supply-chain disruption as the supplier delivery index improved markedly. Of course, Chinese data are often difficult to interpret with any great certainty at this time of year due to the changing dates of the Lunar New Year holidays.

Japanese IP beat expectations in December but still declined sharply in Q4
Today’s Japanese data were a mixed bag. Despite exceeding expectations, today’s IP data still reported a modest decline in December (-0.1%M/M) amid weaker external demand and persisting supply bottlenecks in certain sub-sectors. Certainly, car production remained subdued at the end of the year, down almost 3%M/M to be still some 13½% below the February 2020 level. This was offset by a jump in production of other transport equipment. But general machinery production was also much weaker. Overall, manufacturing output fell more than 3%Q/Q in Q4, suggesting a non-negligible drag on growth in the final quarter of 2022. And with inventory levels still extremely elevated, and global demand still subdued, the near-term production outlook remains relatively weak.

Japanese retail sales rose in Q4, but consumer confidence remains subdued
Japanese retail sales beat expectations in December too, albeit the rise of 1.1%M/M failed to fully offset the drop in November. Nevertheless, this still left the value of sales up 1.2%Q/Q in Q4. The pickup reflected a jump in sales of household appliances (8.9%M/M) and fuel (6.3%M/M). But it will also be due to higher prices, for which consumer goods inflation stood at 7.1%Y/Y in December. Indeed, when adjusting for these price developments, we estimate that real retail sales fell more than 3%Y/Y. The near term spending outlook remains uncertain too. Admittedly, the headline consumer confidence indicator rose for a second-successive month in January, by 0.7pt to 31, a five-month high. But it still remains 5.5pts lower than its level a year ago, and 10pts below its long-run average. Moreover, the survey index for households’ willingness to make major purchases edged marginally lower at the start of the year, to be still almost 19pts below the long-run average.

Japanese employment rose slightly in December, but new job offers fall back
Consumers were reportedly again more upbeat about their expectations for employment over the coming twelve months. But today’s labour market figures were hardly indicative of a marked improvement at the end of last year. The number of people in employment rose 60k in December to 67.2mn. But this followed a cumulative drop of 300k in the previous two months. And compared to a year ago, employment was just 70k higher. With a similar increase in the labour force, the unemployment rate was unchanged at 2.5%, still above the pre-pandemic trough (2.2%) but nevertheless low by international comparisons. But the outlook for jobs growth remains uncertain, with the number of job offers down for a third consecutive month in December.

UK figures likely to show that mortgage approvals fell further in December
In the UK, today will bring bank lending numbers for December. Given higher borrowing costs, mortgage approvals are expected to have fallen further from November’s more than two-year low (46.1k). Mortgage lending, however, is likely to have remained relatively robust in December, given that it will still reflect loan offers made before the Truss crisis. And there might well have been a pickup in credit card lending in the run up to the festive period.

US employment cost index in focus as FOMC meeting gets underway
In the US, as the two-day FOMC meeting gets underway, today will the employment cost index, which is arguably the best measure of labour compensation and closely watched by the Fed. A notable cooling in Q4 is likely to ease the Fed’s concern about labour costs and service prices. Today will also bring the latest Conference Board consumer confidence survey for January, as well as FHFA and S&P CoreLogic house price indices for November.

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