Industrial production continued to disappoint in June, as production volumes fell by 0.9% month-on-month, contributing to a 6.1% year-on-year decline in output, adjusted for seasonal and calendar effects. At a sectoral level, the picture remains unchanged from recent months, with volumes expanding only in the electrical and transport equipment sub-sectors.
Essentially, these sub-sectors are largely producing for export sales, while others are clearly struggling with domestic sales. We see no major improvement in domestic demand going into year-end. Plus, as forward-looking indicators suggest that recessionary forces are building globally, this could weaken export prospects. Therefore, although the next month or two may bring some minor improvement, the longer-term outlook is still not favourable.
June’s retail sales release surprised to the upside as the annualised index improved to -8.3% YoY after a 0.7% monthly increase in sales volume. At the component level, both food and non-food retailing grew, with the latter posting an exceptionally strong 2.5% MoM performance. As for fuel sales, volumes fell on a monthly basis in line with higher fuel prices.
The tourist season (and the World Athletics Championships) might boost retail sales in the short run, but in general, constrained household purchasing power remains a major drag on retail performance. And although we expect a turnaround in real wage growth as early as September, we believe this will have a limited impact on retail sales this year, given the depleted savings and rising household overdraft debt.
Average wage growth remained strong in June, rising by 16% YoY, although this was a bit slower compared to May. However, after adjusting for inflation, real wages fell by 3.4% YoY, extending the streak of negative real wage growth to 10 months. In our view, even after the turnaround in real wage growth in September, we do not expect a rapid recovery in consumption due to depleted savings and depressed consumer confidence.
The three-month unemployment rate rose slightly to 4.0% in the May-July period, which is remarkably low given the one-year technical recession. We believe that even if positive seasonal effects fade, the peak could remain close to 4% as companies face structural labour shortages. Nevertheless, this puts upward pressure on wage growth and thus represents an upside risk to the inflation outlook.
