Historically Low Levels of Sentiment in Manufacturing Contrasts with Record Optimism Among Service Providers

July 09, 2012 /

Japanese private sector companies expect business activity to be higher in 12 months’ time, according to the latest Business Outlook survey conducted by Markit.

Positive sentiment is linked by panellists to expectations that new business wins will bolster activity growth in the coming year. Plans to expand business operations are also mentioned by a number of survey participants.

A net balance of +15 percent of private sector firms in Japan predict higher activity levels come June
2013. Although the highest in three outlook periods, the extent of positive sentiment is below the global
average (+37).

Service sector firms report increased confidence regarding future activity levels, with a net balance of
+16 up from +8 in February. This is the highest reading since the start of the series in October 2009, and broadly similar to the net balance for goods producers (+15). In manufacturing, however, the degree of optimism was the joint lowest on record.

Japanese manufacturers are also less upbeat about revenues, new orders and profits, with respective net balances at, or near, record lows in June. They are still more confident than service providers with regards to new business, however, despite the net balance for service sector new work being at a joint record high.

Job hiring intentions remain positive across both sectors for the year ahead, but net balances indicate only modest rates of employment growth. Service providers foresee an increase of input costs on balance, although inflation expectations are only mildly positive. In contrast, goods producers expect input costs to be lower in 12 months’ time. They plan to reduce their average tariffs as a result.

A fall in business confidence is apparent at the global level. Growth of activity is expected by +37 percent of private sector firms on balance, down from +44 percent in February. However, sentiment remains above that recorded in late-2011. US firms continue to be among the most positive in their growth expectations, although optimism has dipped since the previous outlook survey. Confidence across the BRIC economies is robust overall, although differences are evident at the national level, with Brazilian and Indian companies notably
more bullish than those in China and Russia.

Firms around the world report lower expectations regarding input cost inflation, following recent price falls for many commodities. Output charges are set to rise at a weaker pace accordingly.

Alex Hamilton, Economist at survey compilers Markit, said: “Japan’s private sector companies are mildly
optimistic about future activity levels, with headline net balances broadly similar across the manufacturing and services sectors. In an historical context, however, the latest survey findings revealed a different story by sector.

“Goods producers are the least upbeat on prospects for activity and new orders since data were first ompiled, citing weak external demand and a fading reconstruction stimulus as the main threats to growth. In contrast, service sector business confidence is the highest on record, with panelists attributing positive sentiment to
expectations of new business wins.”


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