Economy in Brief: 2022

Japan's leading economic index in June slipped to 100.6 from a level of 101.2 in May. May, in turn, had slipped from a level of 102.9 in April.

The leading economic index, which is an index that tries to look at currently available economic data and assess what it means for future economic performance, declined at a 0.8% annual rate over three months, at a 4.4% annual rate over six months and at a 2.8% annual rate over 12 months. However, because of the timing of the pandemic, over a 24-month period, the index is up at a 21.5% annual rate.

Clearly Japan is solidly in the recovery from COVID; however, it's not continuing to make much headway anymore. The sequential annualized growth rates reported above and presented in the table paint a picture of continuous slowing ahead, although the trend for the slowdown does not have a steady profile. There is a significant decline over 12 months, which worsens over six months, and then shows less distress over three months. On balance, Japan's economy is waffling and continues to get weaker; it has weakened in each of the last two months. This, in part, is because of a tougher comparison with April; in April, the leading economic index moved up to 102.9 from a level of 100.8 in March marking its highest point since December. The LEI index was last higher than its April 2022 level last in July 2021.

When the leading economic index lurches like it has been doing, its signal is less useful to markets and to policymakers.

Consumer confidence The components of the leading economic index are available as of May. They lag by one month; however, there is a related topical economic statistic that also available through June: that is the reading on consumer confidence.

Consumer confidence rose in May compared to April rising to a level of 32.9 from a level of 32, but in June it was set back to 32.2. Consumer confidence has a net gain from April over three months it's falling at a 6% annual rate; falling at a 31.5% annual rate over six months; over 12 months it's falling at a 14.4% annual rate. Like the leading index, consumer confidence is declining over 12 months, the decline speeds up over six-months, then it slows down over three months. These two indexes that draw from diverse kinds of economic data but obviously are linked to the economy suggests that there has been some widespread slowdown that subsequently dissipated. This common pattern is not simply random variability.

LEI components On a lagged basis, the inputs for the Japanese leading economic index show consistent positive changes from the interest rate spread. Loan and deposit changes are also positive although they've slowed. Starts for dwellings have positive changes over six and 12 months but a small net decline over three months. Deliveries and stockpile show month-to-month changes that are positive indicating consistent economic pressures and desires to rebuild stocks. These signals are consistent with growth. However, these metrics, while positive, have slowed on horizons of 12-months, to six-months to three-months. Export growth continues to exceed import growth in the LEI framework and there's no clear trend in that pattern.

With the Bank of England hiking its key rate by 50 basis points and planning to squeeze its balance sheet, the U.K. housing market (the RICS survey covers England and Wales) has been reacting to the central bank's tightening; expectations for prices three-months ahead have lost a lot of momentum. The chart looks at house prices over the last three-months comparing them to expectations for the prices over next three-months. While current prices have begun to soften slightly, there's a much bigger impact on prices expected over the next three-months.

If we rank performance of the last three-months historically, it ranks in the top seven percentile of where prices have been over the last 23 years. And if we rank current house price expectations on that same timeline, they have a 44-percentile standing, below their median (the median stands at a 50-percentile ranking). And this, of course, is occurring in an environment where inflation is hot and is driving prices in the economy higher.

House prices are affected by inflation, but they're affected more immediately by interest rates when there are consequences for mortgage rates. When mortgage rates rise, house payments rise at every given price for housing. And in a market that may have gotten a little overripe with housing prices ramping up in a slightly inflationary environment, an acute vulnerability can develop. Houses can become overpriced or ‘fully priced’ such that increases in official rates can have an outsized impact on the market. Rising mortgage rates would take an already fully priced housing market and create a financing burden for new buyers, depressing prices and sales. And for existing homeowners (well, partial ‘owners’), who are paying their mortgages at variable rates, payments will go up as well.

The Bank of England’s 50 basis-point hike is the biggest hike since 1997. And it's occurring in an environment with a good deal of inflation and where the Bank of England thinks that inflation is going to escalate further before it's able to gain control of it because of past increases in energy prices. Currently the Bank of England looks for its consumer price inflation to peak at just over 13%. Previously had expected the peak to occur at 11%. This is the major reason for the Bank to have adopted the 50-basis point rate hike in August.

Sales expectations have been hit hard, too. Sales expectations had been at a net of +9 in the RICS survey back in April, but in June that figure sits at -9 and has a 9% queue standing which means that it has been weaker historically only 9% of the time over the last 23 years.

New sales are also weakening. But the series ‘new sales’ has been a peculiar series that was extremely strong in May 2021 but then by July had slipped into relatively deep negative readings and then made some recovery posting positive readings in February and March of 2022. However, since then, it has slipped to a reading of -4 in April, to -5 in May, and to -13 in June. The -13 reading has a 23-percentile standing in its queue of data back to 1999. That means that sales were weaker than this about one-quarter of the time historically. And this is only the impact on current sales; sales expectations, as we mentioned above, are still being reduced. We are going to see weaker readings in the months ahead.

The economy is under stress and there are some expectations of a recession. The GfK consumer confidence rating for the U.K. slipped to -41 in June from -40 in May. The reading had been at -38 in April. The 12-month average is -22. Clearly, this series has been slipping significantly in recent months. In June, it has fallen to its all-time low since 1999.