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Flash Japan PMI signals resilient third quarter growth but gloomy outlook
24 September 2019Bernard Aw
Flash PMI data shows resilient rate of growth at end of third
quarter…
… but the Japanese economy remained mired in unbalanced
expansion, led by services
Business confidence falls to 5½-year low
Japanese business activity growth remained firm at the end of
the third quarter, led by a resilient service sector, according to
flash PMI data. However,
forward-looking indicators suggest that growth momentum may falter
in coming months, as reflected by weak sales growth, a stagnating
job market, falling backlogs and the lowest level of confidence for
over six years during September. Latest PMI data therefore raised
doubts whether the private sector economy can withstand the planned
increase in the sales tax next month, at a time of growing
headwinds to global trade.
Looming sales tax hike to hurt growth
The Jibun Bank flash PMI, compiled by IHS
Markit and covering both manufacturing and service sectors, fell
from 51.9 in August to 51.5 in September, indicating only a modest
expansion in Japanese private sector output.
At this level, the PMI indicates that the pace of annual GDP
growth is around 1% at the end of the third quarter.
With the service sector having played a crucial role in driving
economic activity, particularly so far this year, amid the
manufacturing downturn, the September flash results raise concerns
that the resiliency of services activity is showing signs of
cracking. The rate of new business growth in September remained
below the average seen in the first half of the year. Services
employment declined for the first time for nearly three years and
business optimism fell to the lowest since July 2016.
A concern is that the upcoming sales tax hike will likely deal a
larger blow to services activity compared to manufacturing
production because of the nature of the sector, as had been the
case in 2014.
Furthermore, when the value-added tax (VAT) was raised from 6%
to 8% in April 2014, the manufacturing sector had been expanding
for just over a year prior to the hike. In contrast, manufacturing
output has fallen in each month so far this year as trade war
impact and falling global business investments hurt Japanese
exports.
The manufacturing downturn looks set to extend into the fourth
quarter amid scant signs of a swift resolution to the US-China
trade war and Japan's tensions with South Korea. Evidence of
front-loading purchases of manufactured goods ahead of higher sales
tax next month suggest that demand could fall off even more in
coming months.
Gloomier outlook backs call for more
stimulus
As the consumption tax hike looms, companies' expectations of
their business activity in a year's time has also deteriorated,
dropping in September to the lowest for five-and-a-half years (and
only slightly higher than the month prior to the 2014 VAT hike).
Furthermore, employment failed to increase for the first time since
late 2016, linked in turn to new business growth remaining
relatively stagnant, which contributed to a decline in backlogs of
work in September.
Tepid client demand growth has also led to lower inflationary
pressures. Overall input prices rose at the weakest rate for nearly
three years, which saw firms raising output charges at the
joint-softest pace for just over two years. Historical comparisons
between PMI survey output charges and core inflation, the Japanese
central bank's preferred price gauge, pointed to core consumer
inflation near stagnation.
Greater stimulus from the Bank of Japan is therefore expected as
the central bank looks set to come under increasing pressure to
loosen monetary policy further to stimulate economic growth and
push up inflation. While monetary policy was left unchanged last
week, the BoJ highlighted that rising economic uncertainty calls
for a review of the economy and
inflation at October's policy meeting.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
