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Japanese private sector economy struggles to gain recovery momentum
20 November 2020Bernard Aw
Flash Japan PMI signals a faster pace of decline in output
during November
New business weakens at quicker rate
Job shedding continues…
… and business confidence slips
The Japanese private sector economy continued its struggle to
gain recovery momentum midway through the fourth quarter, with
flash PMI survey data indicating a further decline in business
activity during November. The deterioration sets the scene for a
subdued economic performance in the final quarter of 2020.
Demand conditions continued to weaken, with inflows of new
busines shrinking further, weighed down by a renewed fall in
exports. Other survey indicators also showed worrying signs.
Operating capacity remained in surplus amid weak sales, leading to
further job shedding. Business sentiment meanwhile slipped to the
lowest for three months.
Stalling recovery
The au Jibun Bank flash Composite PMI, compiled by
IHS Markit and based on 85-90% of responses received from the
monthly surveys, dropped from 48.0 in October to 47.0 in November.
The latest reading signalled a further and faster decline in
private sector output across both manufacturing and services.
The data suggest that the pace of recovery is stalling, putting
the economy on track for a subdued fourth quarter. At 47.5, the
average PMI so far for the fourth quarter is just a mere 1.9 points
higher than the 45.6 in the third quarter, far underwhelming the
gain of 14.1 points recorded in the three months ending
September.
Although recent GDP data showed the economy expanding 5.0% in
the third quarter, that followed an 8.2% decline in the second
quarter and left GDP still 5.9% below levels of a year ago,
underscoring the sluggish recovery to regain pre-pandemic output
levels.
Stubbornly weak demand may also limit the extent to which
activity rebounds in December. Inflows of new business fell further
and at a marked rate in November, reflecting subdued domestic and
foreign demand as rising COVID-19 infections in many countries,
including Japan, dampened activity.
The survey also indicated a persistent surplus in operating
capacity, as reflected by a further drop in backlogs of work, with
the rate of decrease accelerating.
Labour market deteriorates
The labour market meanwhile also deteriorated in November amid
weakening sales and rising spare capacity, representing a setback
to the recent move towards stabilisation signalled by the PMI's
employment index. The decline in overall employment accelerated
from October, with the service sector seeing a renewed fall in
workforce numbers.
Factory employment continued to shrink, albeit marginally.
Anecdotal evidence indicated that factories commonly reduced their
headcounts or opted not to replace voluntary leavers in response to
falling output.
Deflationary pressures
The PMI data also highlighted how prices continued to fall
mid-way through the fourth quarter. Input costs fell for the first
time in six months during November, with a stronger yen, lower wage
bills and falling fuel prices cited by respondents as reasons for
reduced expenses. That said, lower input prices were limited to
services firms as manufacturers reported further input cost
inflation linked to increased transportation fees.
Amid efforts to fight for sales, firms across both manufacturing
and service sectors increasingly offered price discounts. Overall
output charges fell for a ninth straight month as a result, with
the rate of decrease hitting the fastest since August.
Outlook
Looking ahead, the path to recovery remains fraught with
challenges, notably as a recent rise in local infections could
re-ignite cautious consumer behaviour alongside a subdued labour
market and a weak outlook for wages. Reintroduced lockdown measures
in many countries due to second waves of new COVID-19 cases could
also weigh on foreign demand for Japanese goods and services.
Although Japanese private sector firms have become more
optimistic about earnings projections, uncertainty of the pandemic
trajectory, even with improved progress on the vaccine front,
alongside balance sheet adjustments and the appreciation of yen
could continue to weigh on capital investment.
We expect Japan's real GDP to shrink by 5.4% in 2020 before
expanding by a relatively modest 2.2% in 2021.
Final PMI survey data for Japan will be released on 1st and
3rd December for manufacturing and services respectively.
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.
