The Chinese economy – especially the larger services sector – continues to recover slowly from the COVID-19 slump earlier in the year, but in Japan its more of a struggle, despite more positive signs.
The official government survey of services and manufacturing yesterday (the private survey of manufacturing is out today and services will be out midweek) showed a slightly slower pace of expansion in August thanks to the bad flooding across southwest areas of the country in the month.
“In addition, some companies in Chongqing and Sichuan reported an impact from the heavy rains and floods, resulting in a prolonged procurement cycle for raw materials, reduced orders, and a pullback in factory production,” commentary with the survey reported.
The official manufacturing Purchasing Manager’s Index (PMI) eased slightly to 51 in August from 51.1 in July, according to the National Bureau of Statistics.
It remained above the 50-point mark that separates growth from contraction on a monthly basis. The market had been looking for a rise to 51.2.
Analysts said the surveys show that China’s vast industrial sector is slowly returning to the levels seen before the pandemic with exports doing surprisingly well, but the recovery remains uneven.
Smaller businesses (the private survey from Caixin/Markit today looks at these firms) sub-index for the activity of small firms stood at 47.7 in August, down from July’s 48.6, with over half of them reporting a lack of market demand and more than 40% of them reporting financial strains, a separate statement from the NBS revealed.
The official PMI, mainly focuses on big and state-owned firms, also showed the sub-index for new export orders stood at 49.1 in August, up from a 48.4 reading a month earlier.
In the services sector, activity also expanded for the sixth straight month, as authorities lift nationwide restrictions on public gatherings, boosting consumer demand.
Non-manufacturing (which includes service and construction) activity, rose to a strong reading of 55.2 in August compared with 54.2 in July. That’s despite continuing weakness in retail sales.
The subindex measuring business activity in services rose to 54.3 in August from July’s 53.1, while the subindex measuring construction activity fell slightly to 60.2 from 60.5. The new-orders subindex for the entire non-manufacturing sector (used as a measure of demand) rose to 52.3 in August from 51.5 in July.
Meanwhile, Japan’s factory output rose in July at the fastest pace on record, driven by automobiles and car parts, signalling a gradual recovery from the blow delivered by the coronavirus pandemic.
But activity in manufacturing remained more than 16% below a year ago, and with another weak reading for retail sales, it is clear the Japanese economy is struggling to recover ground lost to the impact of the pandemic and lockdowns (not to mention the last increase in the GST).
Japan’s Ministry of Economy, Trade, and Industry said Japan’s industrial output grew 8.0% in July from June after the weak 1.9% increase in June.
While the growth rate was the fastest on record going back to 1978, the government said it was also the second straight month of gains after having hit its lowest level in May since the global financial crisis.
Manufacturers surveyed by METI expect output to increase more slowly at 4.0% in August and 1.9% in September (because they see weak demand continuing, especially for cars and especially from export markets).
As optimistic as all these readings are, Japanese industrial output is still 16.1% under a year ago and unlikely to recover to that level for more than a year.
Compared with a year earlier, output was down 16.1%.
But retail sales fell for a fifth straight month and at a somewhat faster pace, a worrying sign for private consumption, which accounts for more than half of the world’s third-largest economy.
Monday’s data underscored the fragility of an economy that suffered a record 27.8% contraction in the April-June quarter as the pandemic took a heavy toll on both domestic and external demand.
That is a reality check, as was the 2.8% annual fall in retail sales in the year to July, more than double the 1.3% drop in June and well above estimates from economists for a 1.7% fall.
Falls in car sales dragged down overall retail sales while department stores and supermarkets suffered from sluggish consumer activity amid a surge in new COVID-19 cases.
Clothing demand also suffered, while oil product sales fell reflecting declines in crude oil prices. On a seasonally-adjusted basis, retail sales fell 3.3% month-on-month in July, posting the first drop in three months.
