DR.CHENJIAZI ZHONG

In Brief

• U.S.: Producer prices recorded the biggest drop in 11 months; productivity rose 0.9% in 2Q17, consistent with the climb in the JOLTS Quits
• Eurozone: Soft and hard data in Germany eased slightly but remain robust; Bank of France sees economic growth of 0.5% in 2Q17
• U.K.: The Brexit dulled another quarter of the economic activity but has not yet impacted employment and is disappearing from inflation; the U.K. economy was better in 2Q17 with real GDP growth accelerated
• Japan: Recovery persisting with economic data stayed encouraging, buoyed by domestic demand as consumer spending recovered and firms increased capital investment
• China: July FX reserves unexpectedly hit nine-month high on boost from weak dollar; initiatives to deflate asset valuations and detox the debt market are working; China’s 751 million Internet users are equivalent to entire population of Europe
• LEIs: Still solid but milder 2H17 global activity

On the U.S.

U.S. producer prices, as measured by the Producer Price Index (PPI), unexpectedly fell in July 2017, recording their biggest drop in 11 months and pointing to a further moderation in inflation that could delay a Federal Reserve interest rate hike. The PPI for final demand declined 0.1% in July, seasonally adjusted, according to the U.S. Bureau of Labor Statistics (BLS), as compared to the up 0.1% in June and unchanged in May. On an unadjusted basis, the PPI for final demand increased 1.9% for the 12 months ended in July. Over 80% of the July decrease in final demand prices is attributable to the index for final demand services, which fell 0.2%. Prices for final demand goods edged down 0.1%. The index for final demand less foods, energy, and trade services was unchanged in July, following a 0.2% advance in June. For the 12 months ended July, prices for final demand less foods, energy, and trade services rose 1.9%. Inflation, the Fed’s another mandate, remains below the 2% target.

U.S. worker productivity picked up more than expected in the second quarter, as hours worked rose at the fastest pace in one and a half years. Nonfarm business-sector productivity increased at a 0.9% seasonally-adjusted annual rate, and between the second quarter of 2016 and the second quarter of 2017, U.S. productivity increased 1.2%, reflecting a 2.7% increase in output and a 1.5% increase in hours worked, according to the BLS. The panelists at National Federation of Independent Business (NFIB), America’s leading small business association, were saying they were planning to raise worker compensation and finding qualified applicants is a top issue. The qualified labor shortage is a factor causing historically low production.

A better second-quarter productivity is consistent with the climb in the Job Opening and Labor Turnover Survey (JOLTS) Quits. The number of job openings increased to 6.2 million as of the last business day of June. Over June, hires and separations were little changed at 2.1% and 1.2%. Within separations, the quits rate and the layoffs and discharges rate were litter changed, according to the BLS.

On Eurozone

Firms, investors, and consumers in the euro area are reacting positively to the recent diminishment of political uncertainty and anti-euro threats. Eurozone economic, business and consumer confidence made new highs in July. Soft and hard data released this week eased slightly, but remain robust.

Emmanuel Macron has won the hearts of business leaders in France, who are counting on him to push through radical reforms to sustain an economic recovery. Confidence is at a six-year high, and executives from Société Générale SA to building materials firm Cie. de Saint-Gobain SA have spoken of a brighter mood since the new president was elected in May. On August 9, the Bank of France reported a better-than-forecast jump in manufacturing confidence and said the economy could grow 0.5% this quarter.

German industrial production unexpectedly fell for the first time this year in June, but remain near May’s historical high. Output declined by 1.1% on the month after rising 1.2% in May, but factories and construction firms in Germany produced 1.8% more in the second quarter than the previous quarter. Order levels, along with business climate indicators, pointed to the upward trend continuing.

German export and import growth disappointed, with exports falling 2.8% month on month and imports 4.5% month on month. The trade surplus though improved to EUR 21.2 billion from EUR 20.3 billion, leaving the total for the second quarter at EUR 61.3 billion, up from EUR 59.9 billion in the first quarter. German exports and imports are still upward trending which is an encouraging sign of global economic activity.

On the U.K.

The Brexit continued to have varied effects on the U.K. economy. The Brexit dulled another quarter of U.K.’s economic activity but has not yet impacted employment and is disappearing from inflation. The U.K. Headline CPI softened to 2.7% year on year and the core series slid to 2.5% year on year in June. However, another step down in the exchange rate would likely lead to an additional bout of inflation, so risks remain.

U.K. employers continue to hire, sending the employment rate to its highest level ever and the unemployment rate down to 1975 levels in May. This seems counterintuitive given the uncertainty Brexit is generating. One explanation could be hiring is quicker and more reversible than CapEx to meet short- to medium-term demand.

The U.K. real GDP growth accelerated to 0.3% quarter on quarter in the second quarter, which was better than the first quarter, despite it is still far from the 0.5% of the post-crisis average. Economic activity was buoyed by services during the quarter; services comprise 78% of U.K.’s GDP and the sector grew by 0.5%. Production and construction contracted. Agriculture grew 0.6% but comprises a sliver of the economy. Film activities comprise 8.2% and supplied a one-off boost.

Retail sales growth slowed in July, but grocery sales continued on an upward trend due to inflation. Overall sales for the industry edged up 0.9% year on year, according to the British Retail Consortium (BRC), down from a growth of 1.1% of the previous year.

On Japan

Japan’s economic data stayed encouraging, buoyed by domestic demand as consumer spending recovered and firms increased their capital investment. Consumers’ appetite for durable goods remains persistent as auto sales for June grew 7.9% in 12 months year on year. The Q2 Tankan Survey showed domestic demand, financial position, lending attitude, and prices all improved across all firm sizes while production capacity and employment became more insufficient.

The Cabinet Office’s leading index, which measures the future economic activity, improved to 106.3 in June, a three-year high. The coincident index, which reflects the current economic activity, came in at 117.2, the highest since March 2014. Export growth slowed to 10.5%, but the pace is still impressive.

The total value of machinery orders, a leading indicator of production which tracks trends in Japanese machine tool orders placed with major manufacturers in Japan, increased by 2.1% in June from May on a seasonally adjusted basis. In the second quarter, it increased by 1.7% compared with the first quarter. Private-sector machinery orders, excluding volatile ones for ships and those from electric power companies, decreased a seasonally adjusted by 1.9% in June and showed fell by 4.7% in the second quarter. Robust global demand boosted Japanese business confidence to a three-year high in the second quarter, heightening policymakers’ hopes that cautious companies will finally increase spending on plant and equipment.

On China

FX Reserves rose for a fifth month to $3.08 trillion in July partly due to that the yuan strengthened around 0.8% against the dollar in July. Capital controls are working. Meanwhile, the pricier currency has affected trade volumes. Export growth slowed for a second month to 8.9% year on year; import growth decelerated for a third month to 14.2%. The stronger currency has been coinciding with milder inflation.

Initiatives to deflate asset valuations and detox the debt market are working. Property prices eased overall and by tier in June; the 70-city average growth rate cooled for the sixth month to 9.4% year on year. On the other hand, aggregate financing and new yuan loans remain in up trends. This hot credit is warranting further regulatory changes.

China’s population of Internet users rose 2.7% over the first half of the year to 751 million, exceeding the population of Europe, according to the China Internet Network Information Center (CINIC). The increase in Internet users in China indicates how the rise of mobile internet services has driven growth in China’s online population and its Internet penetration. In China, 96.3% of internet users had access through their cell phones, an increase of 1.2% from the end of 2016. Among mobile internet applications, food delivery, wealth management, and bike-sharing put up some of the biggest growth numbers. At the end of June, online food delivery services had 274 million users, a 41.4% increase from the end of 2016, making it the fastest-growing sector. The number of people that used the Internet to manage their money grew 27.5% over the first six months to 126 million. China’s online payment industry has also taken off over the last six months, hitting a record 502 million online payment users, making China one of the most cashless countries in the world. Users of bike-sharing services are another major growth group. The number of users surged from zero just over a year ago to 106 million in June, accounting for 14.1% of all internet users, according to the CINIC report.

On LEIs

The OECD’s Leading Economic Indicators (LEIs) continue to indicate economic activity for the second half of 2017 will be milder in most G7 countries, as the nominal reacceleration concludes, the “spinach” period commences in U.S. politics, and real growth drivers are delayed till early 2018.

Looking ahead, activity for the second half will temper in most G7 countries, according to the July release of LEIs. The reacceleration in the global economy this year has bought time, but the recent batch of LEIs plus inflation growth peaking stresses the urgency of real growth drivers, e.g., fiscal policy, to carry forward the momentum. Unlike the rest of the world, the LEIs for European countries are indicating the expansion will continue to steam ahead.