Japanese GDP Contracted in 3Q, while Eurozone Growth Slowed in Half

November 14, 2018

Data released this Wednesday confirmed a widening gap between economic growth in the United States on the one hand (3.5% at a seasonally adjusted annualized rate SAAR last quarter) and Japan and Euroland on the other.

  • Japanese real GDP contracted 0.3%, or 1.2% SAAR in 3Q. Personal consumption (-0.5% SAAR), public sector expenditures (-0.9%), and non-residential business investment (down 0.9%) contracted, and  net foreign demand and inventories each exerted a 0.3 percentage point drag on overall GDP growth. GDP was merely 0.3% greater than in the third quarter of 2017. Moreover, the GDP price deflator was unchanged on quarter and 0.3% lower than a year earlier. Nominal GDP contracted 1.1% SAAR and was flat on year.
  • The non-annualized quarter-on-quarter growth rate of euro area real GDP was only 0.2% in 3Q18, down from 0.4% in both 1Q and 2Q and 0.7% in the final two quarters of 2017. Real GDP growth from a year earlier dropped half a percentage point to 1.7% and was more than a full percentage point less than the 2.8% rise in the four quarters through the third quarter of 2017.

In market action prior to the release of U.S. consumer price data, the dollar today was unchanged against the euro, Aussie dollar, peso, and yuan, up 0.2% versus the Swiss franc and 0.1% relative to the yen, but down 0.3% against the kiwi and 0.1% vis-a-vis the loonie.

Stock markets in the Pacific Rim fell 1.7% in Australia, 0.9% in China, 0.7% in Hong Kong, 0.4% in New Zealand, and 0.2% in South Korea but firmed 0.4% in Indonesia and 0.2% in Japan. European trading has seen equities slump 2.0% in Greece, 0.8% in Italy, 0.3% in Switzerland, 0.2% in Spain and France and 0.1% in Germany, but the British Ftse firmed 0.2%.

British Prime Minister May struck a tentative Brexit deal with her EU negotiators, but that’s only the easy part. It seems unlikely that her mutinous cabinet, let alone the full British parliament will accept the deal. Labour leader Corbyn called the terms “botched.” If the cabinet and parliament manage to approve the deal, it then needs to be ratified by the members of the EU.

Intra-Euroland tensions continued to be reflected in sovereign debt yields. The ten-year German bund yield dipped a basis point and is back under 0.40%, while its Greek and Italian counterparts went up six and four basis points additionally today. The 10-year U.S. Treasury yield is unchanged at 3.14%, while the British gilt slid 3 bps to 1.49%. The 10-year JGB is a basis point softer.

The biggest financial market story continues to be oil. WTI is quoted at only $56.09 per barrel. Gold is steady and hovering marginally above $1,200 per ounce.

Within the euro area, GDP last quarter fell 0.2% in Germany, trimming on-year growth to 1.2%. Italian GDP was unchanged on quarter and just 0.8% higher on year. French and Spanish GDP rose by 0.4% and 0.6%, respectively. Eastern Europe grew generally faster, with quarter-on-quarter increases of 1.9% in Romania, 1.7% in Poland, 1.2% in Hungary but just 0.4% in the Czech Republic.

Revised Japanese GDP contracted 0.4% in September and was 2.5% lower than a year earlier. Capacity usage sank 1.5% on month and 3.1% on year. Japan’s tertiary index of service-sector activity fell 1.4% in September and 0.6% on year, its worst results in over a year.

Industrial production in the euro area posted a monthly drop in September of 0.3%, marking the third contraction in the last four reported months and leaving output merely 0.9% above its year-earlier level.

Employment growth in the euro area decelerated in the third quarter to 0.2% versus 2Q and 1.3% compared to the year-earlier quarter.

Chinese retail sales growth slowed 0.6 percentage points to an on-year 8.6% in October, missing market expectations. Industrial production was 5.9% greater than a year earlier, roughly in line with expectations but down from a 2018 on-year high of 7.0% last April. Fixed asset investment in China climbed 5.7% on year during January-October, down from 7.5% in full 2017. The unemployment rate in October matched September’s 3-month low of 4.9%.

British CPI inflation stayed at 2.4% in October instead of inching up to the market’s expectation of 2.5%. Core CPI was below 2.0% at 1.9%. Producer output price inflation rose 0.2 percentage points to 3.3% last month, while producer input price inflation slowed a half percentage point to 10.0%. The government statistical agency (ONS) reported an uptick in house price inflation to a 5-month high of 3.5% despite an unchanged month-on-month change.

Consumer prices in the year to October stayed at 2.3% in Sweden and Spain and as well so at 2.2% in France, edged 0.1 percentage point lower to 1.8% in Poland, and accelerated to 1.5% from 1.3% in Finland.

The Bank of Thailand’s one-day repo rate was left unchanged at 1.5%, its level since back-to-back 25-basis point cuts in March and April of 2015. The benchmark had been earlier reduced by 150 bps from November 2011 through March 2014. A released statement from Thailand’s Monetary Policy Committee, however, suggested that a rate hike may occur reasonably soon. Today’s vote was only 4-3 in favor of not changing policy compared to votes of 5-2 at September’s meeting and 6-1 in August.  The three dissenters felt that Thailand’s economy has proven robust enough despite softer growth in net exports to begin rate normalization. Inflation is expected rise gradually.

The Central Bank of Sri Lanka adjusted the composition of monetary policy, insisting that the changes would have a neutral impact on the stance. While reducing the required reserve ratio to 6.0% from 7.5%, officials in exchange raised their key deposit rate to 8.0% from 7.25% and lending rate to 9.0% from 8.5%. A released statement projects CPI inflation in low single digits for the rest of this year and within the 4-6% target in 2019 and thereafter.

Indian wholesale price inflation accelerated 0.15 percentage points to 5.28% last month due to higher fuel costs mainly.

South African retail sales dropped 0.6% on month in September, slashing their 12-month increase to just 0.7% from 2.5%.

U.S. consumer prices rose by an expected 0.3% last month, lifting the 12-month rate of increase to a 2-month high of 2.5% but still below the 2.9% in June and July. Core CPI, which excludes food and energy, slowed to a 6-month low of 2.1%. Energy jumped 2.4% on month and 8.9% on year, but world oil prices are now falling sharply. The president of the Minnesota Federal Reserve district said that firms having difficulty filling job positions might try offering higher wage compensation.

Treasury-compiled U.S. capital flow data get released this afternoon.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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