Economy in Brief: 2022

GDP in Japan fell by 1.2% at an annual rate the third quarter after rising 4.6% at an annual rate in the second quarter. Year-over-year growth in GDP still progressed, rising to 1.9% in the third quarter compared to a year-over-year gain of 1.6% in the second quarter. The year-over-year calculation benefits from a data quirk that finds the third quarter one year ago simply much weaker than this third quarter in 2022. The effect of that is to cause year-on-year growth to benefit despite the growth slide in Q3 of 2022 – even though that seems counter-intuitive. It is counter-intuitive, but it is also arithmetic. The change in the year-over-year growth is being driven by the shift in the base period much more than the new data release of today.

Quarter-to-quarter growth Private consumption slowed sharply in the third quarter from a 5.1% annualized quarterly rate from a 1.1% rate in the third quarter. Public consumption also slowed from a 3.4% annual rate of expansion in Q2 to being flat in Q3. The slowdown with consumption spans both the private sector and the public sector at the same time and both slowdowns were quite significant. Fixed capital formation also slowed, falling to a 4.8% annual rate pace in the third quarter from a 6% pace the quarter before plant and equipment spending slowed its 6.3% pace from a 9.9% annual rate the quarter before. Housing contracted, falling at 1.7% annual rate but that was actually an improvement from a 7.4% annual rate fall in the second quarter.

On the trade front, exports improved to a 7.9% annual rate of growth after a 7.2% growth rate in the second quarter; imports however had only grown by 3.3% at an annual rate in the second quarter but surged, gaining 22.6% at an annual rate, in the third quarter helping to drive the trade account into deficit.

Domestic demand in Japan slowed to 1.4% annual rate from a 3.9% pace in the second quarter.

The quarter-to-quarter slowing of the economy is pervasive with slowing in most of the categories, exports are an exception and housing is another exception; although housing investment declined it declined by less than it had in the second quarter. Consumption was especially weak in the third quarter- Domestic demand slowed yet imports surged by 22.6% at an annual rate, a sharp increase in import demand particularly with domestic demand slowing.

Year-over-year data quirks drive an improvement The picture from year-over-year growth in Japan is quite different from the quarter-to-quarter results. Most categories in GDP show stronger growth in Q3 than in Q2 on a year-over-year basis. Looking at year-over-year growth, the consumption picture is mixed with private sector consumption speeding up to a 4.3% pace from a 3% pace. The second quarter saw public sector consumption slowing to 0.9% pace from a 2.1% pace in Q2.

Capital spending picks up the third quarter compared to the second quarter on a year-over-year basis: gross capital formation rises by 0.9% after falling 2.8% in the second quarter; plant and equipment spending rises at a 4.2% annual rate after edging ahead by just 0.2% year-over-year in the second quarter. Housing declines in the third quarter falling at a 4.9% annual rate, but that's an improvement from the 6.2% annual decline in the second quarter continuing the theme of improved quarter-to-quarter performance in the year-over-year growth rates.

On the trade front exports expand at a 5.6% annual rate year-over-year after slipping to a 2.9% annual rate in the second quarter; imports rise even more strongly at a 10.6% annual rate after a 3.8% annual gain in the second quarter.

Domestic demand rises to 2.9% in Q3 after a 1.8% increase in the second quarter in the year-on-year framework

The year-on-year surprise Year-over-year results are somewhat curious since the base for the third quarter year-on-year calculation gets weaker, the year over year numbers improve instead of decay. The reason for that is the base of these calculations which is the third quarter of 2021 saw extreme weakness in GDP on a quarterly basis one year ago with GDP falling 2.5% in that quarter and other components are showing weakness as well. As a result, the weakness that is posted and Q3 of 2022 is actually less than the weakness that occurred a year ago and that drives the year-over-year growth rate stronger. In this case the year-over-year numbers are misleading in terms of what's going on with the economy even though we often prefer to look at year over year numbers as being smoother and more indicative than quarterly numbers. Not so this quarter in Japan…

Industrial production in the European Monetary Area rose by 0.9% in September following a 2% increase in August. The pattern for industrial production shows declines over the usual sequential periods, but there is no indication of any change in trend. Over 12 months, the increase in industrial production is 4.3%. Over six months output rises at a 6.1% annual rate, over three months the annual increase is lower at 2.3%. Manufacturing output rose 1.5% in September after rising 1.7% in August and, again, there is no clear pattern of acceleration or deceleration. Manufacturing output increases over 12 months, over six months and over three months and does so without creating any tendency to accelerate or to decelerate.

Monthly results The components of manufacturing showed a decline in consumer durables output and a decline in intermediate output in September while nondurable output increased by 3.6% and capital goods output increased by 1.5%. In August, only intermediate goods output declined.

Sequential trends Looking at sequential trends, consumer goods output shows clear acceleration; output grows by 5.6% over 12 months; that steps up to a 12.2% annual rate over six months and up again to 27.7% annual rate over three months. That result is driven exclusively by nondurable goods where the acceleration is strong while output for consumer durables is showing clear deceleration from a 3.9% pace over 12 months, to a contraction of 1.2% at an annual rate over six months and giving way to further contraction at a 4.4% annual rate over three months. Within the consumer goods sector output is both accelerating and decelerating depending on the industry grouping.

Intermediate goods trends show clear deceleration. Intermediate goods output falls at a 2% annual rate over 12 months, falls at a 3.4% annual rate over six months, and falls at a 9.2% annual rate over three months.

Capital goods output, while showing increases in September and August, shows an unclear pattern when it comes to looking at acceleration or deceleration trends. Capital goods output is up at a 10.8% annual rate over 12 months; that accelerates to 14.6% at an annual rate over six months but then falls back to a 1.1% annual rate gain over three months.

QTD: Quarter-to-date (preliminary Q3 results) Quarter-to-date headline for the European Monetary Union is increasing at a 6.1% annual rate. This report is for September, so these figures represent preliminary closure for data for the third quarter. Manufacturing output is increasing at a 6.9% annual rate. Consumer goods output increases at a 14.5% annual rate; that result is the combination of a 15.4% annual rate rise for nondurables and a 3% annual rate drop for durable goods. Intermediate goods output is declining at a 7.6% annual rate while capital goods output expands and a 9.5% annual rate.

Output gains since Covid struck Looking at output trends back to January 2020 before COVID struck, the aggregate increase in output rises by 2.7%, manufacturing output is up by 3.3%, consumer goods output is up by 10.4%, led by nondurable goods: capital goods output is barely up rising by 1.5% and intermediate goods output is declining by 0.2%. These are the aggregate gains/losses over a period of 2 years and eight months.

The EMU PMI in comparison... Over the same span, the manufacturing PMI of the European Monetary Union is lower by 10% and that index is lower in each of the last three months as well as lower on balance over three months, over six months and over 12 months. The breath of output in the EMU is clearly on the decline. The level of the PMI reading for manufacturing is below 50 (an indication that output is contracting in the lexicon of the PMI report) in May, June, and July. The PMI is also below 50 on its three-month average. But its six-month average ekes out a reading of output expansion at a standing of 51.7 while the 12-month average reading is a robust 55.1. Compared to the manufacturing results for industrial output, a sequence that shows a steady menu of consistent increases, the PMI indicators have been pointing to weaker conditions than those that have been experienced.

EMU by country Country level data for 13 European Monetary Union members in the table and three other European members are available for comparison (the U.K., Sweden, and Norway). EMU members showed declines in output in September in 6 of these 13 members. August also showed a decline in six members. However, July produced declines in eight of 13 members.

Sequential data across these same 13 members shows increases in 12 of 13 countries over 12 months; over six months five countries showed declines in output. And over three months seven countries showed declines in output. The pattern for output is mixed across the European Monetary Union; it's hard to make any simple consolidating statement except by looking at the weighted overall European Monetary Union results at the top of the table which does show output is continuing to expand on a weighted basis. In the quarter-to-date, however, that marks the end of the third quarter on a preliminary basis, output is declining in eight of the 13 countries even as it increases for EMU overall. Annualized the 3.3% manufacturing gain implies growth rates averaging 1.2% per year over this period.

The global economy has been slowing down and forecasts have been flirting with recession for some time. As 2022 kicked off, the United States began with two quarters of negative growth even though the unemployment rate in the U.S. remained low and the economy appeared to be relatively robust. However, as the year has gone on, the Federal Reserve, the Bank of England, and the European Central Bank have been raising interest rates to fight well-over-the-top inflation amid concerns that have arisen that recessions could visit all these countries and might do so soon.

In the third quarter, the U.K. has posted a negative GDP number, -0.7% annualized. Year-over-year U.K. growth is still relatively firm at a 2.4% annual rate. But that is a clear deceleration from its second quarter (Y/Y) growth rate of 4.4% at an annual rate. Globally, economies are in this period in which GDP growth rates are still transitioning toward normal from what had been a boost provided in the recovery from the COVID recession. All of this makes it a little bit more difficult to focus on exactly how the economy is performing and on what the growth rate is, especially as growth is transitioning out of the COVID recession, into recovery, and, possibly, back into recession. What a mess.

Bubble, bubble, toil, and trouble Interest rates in the U.K. have gone up sharply. There's been political turmoil and two changes in the Prime Minister position in a relatively short period of time. The pound has come under a great deal of pressure and has fallen sharply on foreign exchange markets as the Bank of England has been hiking rates to reel in excess inflation.

Q3 growth: quarter-over-quarter The third quarter -0.7% (Q/Q) rate in GDP is largely the result of a 2.2% fall-off in private consumption. Public consumption rose at a 5.5% annualized pace. Capital formation continues to be strong up at a 10.6% annual rate overall. Investment was up at a 17.7% annual rate in the housing sector. U.K. exports have been strong because of weakness in the pound, rising at a 36% annual rate on a quarterly basis while imports have fallen at a 12.3% annual rate in the third quarter. Domestic demand has fallen at a 13% annual rate in the third quarter.

Central bankers try to have their cake and eat it too Despite strength in exports and resilience in investment spending with interest rates moving up and with consumer spending weak, we would not expect to see investment demand continue to be this strong. Clearly the U.K. is headed for more difficult times and the Bank of England still has work to do because the inflation rate continues to overshoot. The challenge for the central bank in the U.K. is the same as the challenge in the United States: central bankers are trying to figure out how much to raise rates to make sure inflation is brought to heel without bringing too much damage to the economy. But… do central bankers know enough to achieve such an objective? That is still a speculative matter. The question may still come down to whether central bankers really want to stop inflation or whether they really want to preserve growth. For the time being, they continue to talk as though they think they can achieve both objectives, but time will tell. And in the U.K., that negative GDP number makes it seem as though the Bank of England has lost this option and has the economy headed for recession.

Year-over-year growth Year-over-year growth rates are always smoother than quarterly results. In the U.K., GDP growth is up 2.4% year-over-year, and the economy logs 0.8% consumption growth. Public expenditures are flat over this span. While capital formation is up by 5.8% and housing is up at a 15.6% annual rate. Year-over-year exports are up 18% and imports are up 7.2%; but even on this basis, domestic demand is off by 0.4%.