Time to wrap up... here are today’s stories:

Goodnight. GW

On Robinhood’s $70m penalty from FINRA, the Wall Street Journal says:

The enforcement action is a blow to the fast-growing online brokerage, which was launched in 2014 and has won over users with commission-free trades and its sleek mobile app.

The company took on millions of new customers and attracted more scrutiny this year as many investors accessed Robinhood to speculate on so-called meme stocks such as GameStop Corp. and AMC Entertainment Holdings Inc. Its forthcoming initial public offering is one of the most anticipated of the year.

CNN points out that Robinhood is still facing scrutiny:

The FINRA sanctions remove one of the major black clouds hovering over Robinhood ahead of what could be a blockbuster initial public offering for the startup. Despite a series of public relations nightmares, Robinhood filed confidentially for an IPOin March. The offering could allow Robinhood to capitalize on its torrent growth and record high stock prices.Massachusetts wants to pull the plug on Robinhood

But Robinhood is still facing scrutiny from regulators and politicians.In particular, Gary Gensler, the chairman of the Securities and Exchange Commission, has repeatedly expressed concerns about the “inherent” conflicts of interest that exist in the payment-for-order flow business model used by Robinhood and other brokerages that don’t charge commissions.

The FT reports that:

In response to Finra’s action, the company said: “Robinhood has invested heavily in improving platform stability, enhancing educational resources, and building out our customer support and legal and compliance teams. We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratising finance for all.”

The penalties come as Robinhood plans a stock market listing to capitalise on a period of explosive growth. The broker dealer has become synonymous with the rise of retail day trading since the start of the pandemic and the boom in “meme stock” trades. It has more than doubled the number of users on its platform in the past year, from 13m at the end of March 2020 to 31m currently, according to Finra.

Retail trading platform Robinhood has been ordered to pay more than $70m in penalties for its “systemic supervisory failures” and the “significant harm suffered by millions of customers”.

Wall Street regulator, the Financial Industry Regulatory Authority, has announced it was fining Robinhood $57m, and ordering it to pay $12.6m plus interest in restitution to its customers.

It’s the largest ever penalty imposed by FINRA, which has outlined a litany of failings.

FINRA says it has considered “the widespread and significant harm suffered by customers”, including millions who received “false or misleading information” from the firm, millions more affected by the firm’s systems outages in March 2020, and thousands who were approved to trade options even when it was not appropriate.

Jessica Hopper, executive vice president and Head of FINRA’s Department of Enforcement, says:

“This action sends a clear message—all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets.

Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later”

A FINRA investigation found that, despite Robinhood’s self-described mission to “de-mystify finance for all,” it has negligently communicated false and misleading information to its customers at during certain periods since September 2016.

That false information covered a variety of critical issues, including:

whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or “negative buying power” customers had, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls.

FINRA cites the tragic case of 20-year-old student Alex Kearns, a Robinhood customer who killed himself after the app showed he had lost $730,000, when his account was actually $16,000 in credit.

FINRA also found that Robinhood failed to exercise due diligence before approving customers to place options trades, and relied on algorithms called “option account approval bots”. These bots would often approve customers to trade options based on inconsistent or illogical information.

In addition, FINRA says Robinhood experienced a series of outages and critical systems failures between 2018 and late 2020, most seriously during the market crash of March 2020.

Robinhood’s inability to accept or execute customer orders during these outages resulted in individual customers losing tens of thousands of dollars, and FINRA is requiring that the firm pay more than $5 million in restitution to affected customers.

Further... FINRA says that between January 2018 and December 2020, Robinhood failed to report tens of thousands of written customer complaints that it was required to report.

In settling this matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings, the regulator adds.

The UK’s blue-chip stock index has posted its longest run of monthly gains since 2016, but it was a close-run thing.

The FTSE 100 index fell by 50 points today, closing down 0.7% at 7037 points.

That means it rose by just 15 points, or 0.2%, during June. That’s its fifth month of gains in a row, which it last managed in June-October 2016.

So far this year, the FTSE is up almost 9%, as the vaccine rollout has boosted hopes for the economic recovery. But the rally did rather tail off this month, as the Delta variant forced a delay to the end of lockdown.

While some UK households are, as Andy Haldane says, feeling optimistic and keen to spend again... other families are enduring a worrying time as the pandemic continues to loom over their lives.

Some working in the hospitality sector have been relying on the furlough scheme for many months to cover 80% of their wages.

They face uncertainty as the scheme becomes less generous tomorrow, with companies having to pick up some of the cost - even if they’re only operating a limited service, or not open at all.

My colleague Phillip Inman explains:

Thousands of workers in the UK will suffer a steep fall in income as employers make redundancies after the furlough scheme begins winding down from Thursday, the Institute for Fiscal Studies warned.

Workers who live with higher earners will be unable to claim benefits and could see their income drop to zero should they lose their job. Families with children could lose as much as a third of their income if they are forced to rely on universal credit, the thinktank said.

“It will mean big income losses for many of those who end up unemployed unless they are swiftly able to find alternative employment,” the IFS said.

The drop will be even larger should the government press ahead with a £20-a-week cut in universal credit, as planned in September, the report added.

The furlough scheme, which protected more than 10 million workers at its peak, in May 2020, and 3.4 million at the end of April, provides employers with 80% of a worker’s salary up to a cap of £2,500 a month.

From 1 July employers must continue to pay 80% of salaries to qualify for the scheme, but they will receive only 70% from the government. In August and September, when the scheme ends, employers will have to pay at least 20% of a worker’s salary, with the government picking up 60% of the wage.

Here’s the full story:

The UK government has announced new laws to replace EU rules on taxpayer-funded bailouts and business support, launching a subsidy system ministers say will help boost jobs and the economy.

In one of the most important pieces of post-Brexit legislation to date, the subsidy control bill will replace EU state aid rules that require its members to seek approval for government support for businesses.

The government said the new UK rules would provide quicker and more flexible assistance to companies and help with the task of levelling-up Britain’s lopsided regional economy and raising investment in green industries, as ministers push to set out the “benefits of Brexit” after leaving the bloc at the start of this year....

The outsourcing company Serco predicts its profits will jump 50% during the first half of the year because of its continued work on Covid-19 contracts for various governments, including the UK’s test-and-trace service.

The firm expects its underlying trading profit for the first six months of 2021 to reach between £120m and £125m, more than 50% higher than a year earlier.

In addition, it forecasts revenues of £2.2bn, almost 20% higher than the same period in 2020, about £340m of which being related to Covid-19.

Serco said it had won record levels of new orders during the period, worth almost £4bn, including large contracts with the Ministry of Defence and the Department for Work and Pensions in the UK, as well as with the Royal Canadian Air Force.

More here:

Andy Haldane also warns that the UK risks a Minsky Moment for monetary policy, if inflation expectations shift upwards in the financial markets, and among businesses and households.

In his speech today, he says:

By the end of this year, I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.

We would experience a Minsky Moment for monetary policy, a taper tantrum without the taper.

This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected.

[This is a reference to Hyman Minsky’s theory that a speculative euphoria develops when borrowing costs are low, leading to excessive speculation and leverage...which eventually sees assets rise too high, triggering a ‘moment’ when asset prices are suddenly reassessed, credit is called in, and a crisis develops....

...While a ‘taper tantrum’ was the market panic in 2013, when bond yields surged and share prices fell when the US Federal Reserve said it was planning to slow its QE programme].

Haldane argument is that central banks were right to go in ‘large and fast’ to protect a collapsing economy when the pandemic struck - but they should now unwind that stimulus faster than planned, given the pace of the recovery.

A slow exit risks putting central bank balance sheets on an unsustainable footing, Haldane explains here:

Entering fast and large, and exiting slow and small, puts a ratchet into central bank balance sheets. With large or frequent enough future shocks, this strategy is not time-consistent: either the stock of Government assets to buy is exhausted or, more likely before that, debt-serving concerns begin to contaminate perceptions of the future monetary stance. The latter is what academics call fiscal dominance. An asymmetric QE response function nudges us towards that fiscal danger zone and adds to concerns about the erosion of monetary policy independence. Or that, at least, is the risk.

It is these two points, taken together, that lead me to believe that this is the most dangerous moment inflation-targeting has so far faced. The answer is not to change the regime itself. Indeed, I can think of few poorer times to do so. In my view it does, however, call for immediate thought, and action, on unwinding the QE currently being provided, given the state of the economy and central banks’ balance sheets. The Bank’s on-going review into the process and sequencing of QE unwind is a welcome opportunity to do so.

A dependency culture around cheap money has emerged over the past decade. Only a minority of those with mortgages have ever experienced a rise in borrowing costs. Fewer still have significant inflation in their lived experience. Easy money is always an easier decision than tight money. But an asymmetric monetary policy reaction function is a recipe for a Minsky mistake. Having followed the right script on the way in, central banks now need to follow a different script on the way out to avoid putting 30 years of progress at risk.

Andy Haldane, the departing chief economist of the Bank of England, has warned that central bankers need to act to keep inflation in check before the ‘cat is out of the bag’.

In a speech released on his final day at the Bank, Haldane predicts that by the end of this year, UK inflation will be “nearer 4% than 3%” -- which would be rather higher than the BoE’s target of 2%, and up from 2.1% last month.

This would increases the chances of a high inflation narrative becoming the dominant one, Haldane warns, forcing banks to tighten policy faster than expected.

This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected.

And in a conversation with the Institute for Government, Haldane warned that if policymakers ignore inflation for too long, it will require a sharper-than-expected rise in interest rates, which would be a “very nasty surprise” to borrowers -- mortgage holders, businesses and governments.

Asked about the outlook for inflation, Haldane (with a nod to the football) says there are “three lions” helping the economy roar back.

1. A natural bounceback as people return to work, to shopping, spending and socialising.
2. Both fiscal policy (government spending) and monetary policy are materially more accommodative than before the pandemic, so we should expect a bounceback above the pre-Covid base.
3. The savings pool that households and companies have built up involuntarily during the crisis, which are more than £200bn for households, and £100bn for companies.

Those savings are ready to be used, and indeed are being used as unemployment falls, continues Haldane (the only Bank policymaker voting to reduce the size of its QE stimulus programme last week).

Many more people are putting their savings to work, they’re buying cars, houses, patio heaters, beer and meals in restaurants. That means aggregate excess demand, at the economy-wide level, with too much money chasing too few goods, Haldane warns:

Economics 101 tells us what happens when too much money chases too few goods, and that what we’re now seeing.

Last month, UK inflation rose over the Bank’s target, to 2.1%.

Q: So you’re giving a warning to act early. What should we do?

The lesson from recent and distant history is that inflation always starts localised and looks temporary, Haldane replies.

But often, without due care and attention, that can be the thin end of the thick wedge, where localised price pressure become generalised, and temporary spikes in prices can become more persistent.

So people’s expectations of inflation to begin to nudge up, or perhaps even to shift up.

That’s a cumulative process, an evolutionary process, that we’ve seen time and again through history. The key takeaway, policywise, is to nip that process in the bud, Haldane insists:

As soon as the cat is out of the bag, getting the cat back into the bag is jolly hard work.

It’s only secured, then, by central banks, monetary policymakers having to playing catch-up, and having to raise rates somewhat faster, or somewhat further, than people were expecting.

That’s the last thing anyone needs right now, Haldane points out, as we emerge from the Covid crisis, with many households, governments and companies carrying scars, including higher debt levels.

The last thing we want from a recovery perspective is having to slam on the monetary policy brakes somewhat harder than people are currently expecting, Haldane continues.

That would be a very nasty surprise to a great many mortgage holders, a great many corporate borrowers, and indeed a great many governments.

Q: We’ve been an era of cheap money for a very long time now, so a reversal would be quite a shock?

Haldane agrees it would catch people unawares.

Many borrowers now do not have a rise in borrowing costs in their lived experience, and that increases the chances that it would be not just a surprise, but a rather nastier surprise than we’d planned.

Inflation is a plague on our all houses, he continues, so it’s important to nip it in the bud as early as possible.

And he warns that the success of the Bank’s inflation targeting regime which began almost 30 years ago could be at risk, as expectations of inflation feel more fragile.

This feels like the most dangerous moment for that regime in its history, since 1992.

In financial markets, he continues, inflation expectations are higher than they have been for a decade. Financial markets have given central banks the benefits of the doubt, Haldane says, but he wouldn’t want those doubts to rise, as it increases the chances of inflation expectations themselves rising -- and where they lead, borrowing costs follow.

Now is the time to underscore the commitment to that inflation target, and reduce the fragility and expectations that I fear have picked up in the last month or two.

Earlier in the IFG event, Haldane also explained that the pandemic, and the double-barreled response from government and central banks, have “few if any historical precedents”.

And he also noted that the debate on debt and deficits has come quite a long way in a short time, with the global fiscal orthodoxy going through “a fairly sharp 90-degree turn” since the global financial crisis (when austerity was high on the agenda).

Back then, Haldane points out, there were concerns about the debt stock getting too large, and the fiscal costs proving too big.

Now, “quite helpfully”, there is less of a focus on aggregate debt stock relative to GDP, and a greater focus on the cost of servicing that debt -- which has dropped, as falling government bond yields have more than neutralised the rise in the debt stock.

However there is an important caveat to this new fiscal orthodoxy -- these higher debt stocks are more sensitive to any rises in borrowing costs, he cautions.

Overall, where we are in terms of worldwide thinking feels more sensible than at times in the past, he adds.

Yesterday, the Bank of International Settlements warned that a rise in interest rates to the levels seen in the 1990s could push interest on UK’s debt above £100bn.

The global economy faces losing over $4 trillion of GDP in 2020 and 2021 due to the crash in tourism due to the coronavirus pandemic, according to a new report from UN agency UNCTAD released today.

UNCTAD estimates that international tourism and related sectors lost $2.4trn of activity in 2020, due to direct and indirect impacts of a steep drop in international tourist arrivals.

Developing countries suffered the largest reductions in tourist arrivals in 2020, estimated at between 60% and 80% - with North-East Asia, South-East Asia, Oceania, North Africa and South Asia worst hit.

UNCTAD warns that a similar loss could be incurred this year, as the recovery in tourism has been slower than expected.

The tourism sector’s recovery will largely depend on the uptake of COVID-19 vaccines globally, UNCTAD points out.

It calls for a renewed push to roll out vaccines globally, as the “asymmetric roll-out of vaccines” means that developing countries are suffering a deep blow from the fall in tourism.

UNCTAD acting Secretary-General Isabelle Durant said.

“The world needs a global vaccination effort that will protect workers, mitigate adverse social effects and make strategic decisions regarding tourism, taking potential structural changes into account,”

The report’s most pessimistic forecast shows a 75% fall in international tourist arrivals this year, based on the tourist reductions observed in 2020.

UNCTAD says:

In this scenario, a drop in global tourist receipts of $948 billion causes a loss in real GDP of $2.4 trillion, a two-and-a-half-fold increase. This ratio varies greatly across countries, from onefold to threefold or fourfold.

But in the optimistic scenario, there is a 75% reduction of tourism in countries with low vaccination rates, and a 37% reduction in countries with relatively high vaccination rates, mostly developed countries and some smaller economies.

The report also warns that the fall in tourism has pushed up joblessness, causing an average 5.5% rise in unemployment of unskilled labour.

UNCTAD adds:

Labour accounts for around 30% of tourist services’ expenditure in both developed and developing economies. Entry barriers in the sector, which employs many women and young employees, are relatively low.

Eurozone inflation has dropped back to the European Central Bank’s target.

Consumer prices across the euro area rose by 1.9% per year, from 2.0% in May -- back to the ECB’s goal of keeping inflation close to, but below 2%.

Core inflation, excluding food, energy costs, alcohol and tobacco, slipped to 0.9% from 1.0%.

Commodity price rises, supply chain bottle necks and a shortage of labour in hospitality and entertainment are all pushing inflation higher, points out Willem Sels, chief investment officer, Private Banking and Wealth Management, HSBC.

But while oil price inflation is starting to drop (as the slump early in the pandemic last year drops out of the calculation), Sels says it’s too early to declare victory over inflation.

We think eurozone inflation may rise a bit further, to reach 2.8% by the end of the year, after which it should start to come down. While oil and other commodities will become less of a driver for inflation this year, low inventories of industrial goods mean that goods price inflation will remain with us until companies have replenished their stock, which may take several months.

And in services, the current pricing pressure we are all experiencing when trying to book a staycation or visit our favourite restaurants will remain until the supply of labour in these sectors catches up with demand later in the year.

But as the ECB principally focuses on core inflation, which remains low, it is likely to leave interest rates at their current record lows for some time, calculating that the current rise in headline CPI is temporary.

Neil Birrell, Premier Miton chief investment officer and manager of Premier Miton Diversified Growth Fund, also sees the ECB will be watching inflation closely:

“CPI in the Eurozone came in as expected for June; fairly muted, as inflation in other major economies is gathering pace. However, there is a dampening impact in Europe from statistical factors.

There is no reason that inflation will not be a notable issue in Europe in the coming months, just as it is everywhere else, as the economy opens up and activity increases. The ECB will be keeping a close eye on it, along with all the other central banks.”

Unemployment in Germany has fallen this month, as its economy recovery gathers speed.

The number of people out of work fell by 38,000 in seasonally adjusted terms to 2.691 million, better than the 20,000 fall expected. The seasonally adjusted jobless rate remained at 5.9%.

In a further positive sign, the number of employees put on reduced working hours in job protection schemes, or Kurzarbeit, fell sharply in June.

Labour Office head Detlef Scheele explained.

“Companies are scaling back short-time work and are looking for new staff again.”

ING’s Carsten Brzeski points out that German firms are also experiencing supply problems:

Interestingly and according to media reports, short-time work schemes are no longer being used to exclusively tackle the fallout from the crisis but also as a result of increasing supply chain disruption, particularly in the German automotive and shipbuilding industry.

Brzeski is hopeful that “the worst seems to be over” for the German labour market.

Employment expectations in both the manufacturing and services sector have continued to improve and are approaching all-time highs quickly. With improving employment prospects and the expected strong rebound of the economy, the risk of bankruptcies and a potential second unemployment wave are decreasing.

In fact, as the economy is likely to return to its pre-crisis level before the end of the year, previous threats of surging unemployment once government support schemes end have become less frightening. In the short run, the lack of skilled workers in certain sectors could become a more pressing issue than any increase in unemployment.

Here’s some reaction to the news that the UK economy contracted slightly more than expected in the first quarter of 2021, while the household savings ratio was a near-record high.

Paul Dales of Capital Economics says the surge in household savings is an upside to economic recovery. It could be longer and fast than expected, if people spend this stock of excess savings:

The small downward revision to Q1 GDP growth probably won’t stop the economy from rising back to its pre-pandemic peak in the coming months.

And the larger-than-expected rebound in the household saving rate increases the potential for faster rises in GDP further ahead.

Martin Beck, senior economic advisor to the EY ITEM Club, says the economy has a solid base for growth [indeed, we already know GDP grew by a rapid 2.3% in April].

“First, the economy emerged from lockdown with a relatively solid base for growth. For sure, GDP fell 1.6% quarter-on-quarter – revised down slightly from the original estimate of a 1.5% decline – but even allowing for the boost to output in Q1 from Government spending on COVID-19 testing and vaccinations, the quarter’s contraction was a far cry from the 19.6% quarter-on-quarter fall in output during the first lockdown in Q2 2020.

“The second point of interest was the significant rise in the household savings ratio to 19.9%, up from 16.1% in Q4 2020. This compared with an average of 8.5% from 2010-19. Higher savings reflected a lockdown-related fall in spending, but incomes remaining flat thanks to private sector adaptation and government support. The elevated savings ratio reaffirms that households are emerging from the crisis with cash to fuel higher spending.

Suren Thiru, head of economics at the British Chambers of Commerce, points out that business investment is still sharply below its pre-Covid-19 levels:

Alastair George, chief investment strategist at Edison Group, points out that the economic recovery hinges on the success of the UK’s vaccination programme.

The data are a reminder of the damage lockdowns wreaked on the economy, even as the UK government provided extensive fiscal support. UK GDP was 8.8% below its pre-pandemic level, one of the worst performances of the G7. A significant proportion of the fiscal support appears to have boosted the household savings rate, which remained elevated at 19.9%.

Looking forward, current economic conditions are clearly much improved but later in the year there will be a fiscal headwind as the furlough scheme draws to a close. The outlook now hinges on the success of the UK’s vaccine program in keeping hospital admissions down to acceptable levels.”

The UK economy shrank slightly more than previously thought during the lockdown earlier this year, as families saved money at the second-fastest rate on record.

UK GDP shrank by 1.6% in January-March, updated data shows, compared with a previous estimate of a 1.5% contraction.

It means the UK economy was 8.8% lower than its pre-pandemic level.

The service sector drove the fall, with services GDP falling 2.1% in the quarter. It was led by education (the move to remote schooling hit output), wholesale and retail trade, and accommodation and food services industries (as shops and hospitality venues were closed).

The lockdown also drove the UK household saving ratio up to 19.9%, the second highest on record (after the second quarter of 2020), showing that families stashed away much more of their income than usual.

This was due to a sharp fall in spending due to the lockdown, while incomes held up well (with the furlough scheme keeping unemployment lower).

There was a 3.2% slump in household consumption in the quarter, while household gross disposable income rose by 0.1%.

The ONS says:

As a result of rising coronavirus (COVID-19) cases, various national lockdowns were introduced across the countries of the UK for most of Quarter 1. As a result, household’s final consumption expenditure fell as the opportunity for selected types of spending was restricted.

Spending in restaurants and hotels fell by 37.2% on the previous quarter while transport fell by 13.9% on the quarter.

Bank of England data yesterday showed that households deposited less into their bank and building society accounts in May than in recent months, suggesting that household savings are returning to more normal levels as people have more opportunity to spend again.

Here’s more on the GDP figures:

In the City, the FTSE 100 index has fallen to its lowest level in over a week - pulled down by miners and travel firms.

Jet engine maker and servicer Rolls-Royce (-2.5%), mining giants Glencore (-2.2%) and Anglo American (-2%), and British Airways parent company IAG (-2%) are leading the fallers.

The FTSE 100 is now down 47 points, or 0.65%, at 7040 points (its lowest since Monday 21st June) with housebuilders and banks also lower.

On the smaller FTSE 250, budget airline easyJet are down 1.3% while WH Smiths, which runs retail shops at airports and railway stations, have dipped 2%.

Travel stocks continue to be weighed down by the latest travel restrictions brought in by some European countries on UK tourists.

Miners are suffering from falling commodities prices - with the US dollar stronger, and the recent rise in Covid-19 cases in Asia-Pacific countries threatening their economic recovery from the pandemic.

The 5.9% tumble in Japan’s factory output last month was much worse than expected, says Bloomberg, pointing out that analysts expected a 2.1% drop.

As well as semiconductor shortages denting car production, manufacturers of all kinds pulled back amid yet another round of restrictions to contain the coronavirus.

Yuki Masujima, Bloomberg economist, explains:

“The deeper-than-expected drop in Japan’s May industrial production reflected a hit from the extended state of emergency to contain the virus. Weaker domestic demand overwhelmed support from exports, which have remained strong.”

They also point out that:

• Output dropped almost across the board, falling in 13 out of 15 industry categories, with vehicle production dropping by nearly a fifth and accounting for about half of the overall decline.

• The sharp drop in auto production also signals that chip shortages may have finally started to squeeze Japan’s automakers after deft inventory management by Toyota in particular seemed to be helping minimize damage. Toyota’s total domestic output of about 274,000 units in May was down by more than 100,000 vehicles from two years earlier, before the pandemic hit.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The global shortage of semiconductors is hurting factory growth across Asia, and feeding through to delays in car deliveries into the UK.

Growth at China’s factories has fallen to a four-month low this month, new figures show, with supply shortages, supply chain problems and rising raw material costs all hitting manufacturers.

And in Japan, industrial output has posted the biggest monthly drop in a year, slumping 5.9% in May from the previous month, hit by declines in the manufacturing of cars and production machinery.

The fall was driven by a 19.4% drop in motor vehicle production, largely due to supply issues with semiconductor chips, the Ministry of Economy, Trade and Industry (METI) said.

A slowdown at Japan’s car industry will have a significant impact on its economy, as Reuters points out:

The [5.9%] contraction, which was the first drop in three months, was much weaker than a 2.4% fall forecast in a Reuters poll of economists. It followed a 2.9% gain in the previous month.

Manufacturers of intermediate goods, such as tires and electrical lighting of passenger cars, are taking a hit from declines in motor vehicle production.

China’s June official manufacturing Purchasing Manager’s Index (PMI), which tracks activity across the sector, dropped to 50.9 from 51.0 in May - nearer to the 50-point mark showing stagnation.

China’s National Bureau of Statistic senior statistician Zhao Qinghe warned that production was hit by “a tight supply of chips, coal and power, as well as equipment maintenance,” adding that:

“Factors such as chip shortages have adversely affected the development of the (automobile) industry,”

Covid-19 outbreaks at key ports in the major export province of Guangdong, and in neighbouring Shenzhen, also caused disruption.

The NBS also reported a slowdown in growth at China’s services companies (the services PMI fell from 55.2 to 53.5)

Firms have been warning for months that the shortage of semiconductors was hurting growth, and today’s data highlights the problem.

Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA, explains:

Stories of Chinese consumers saving instead of spending have been circulating for a while now, and it seems to be showing up in the data. Logistics and chips are making their presence felt in manufacturing.

Chips and ships will be a problem for the world as a whole for some time to come, and it could be that the initial Northern hemisphere reopening spending frenzy has eased somewhat.

Carmakers are scrambling to get hold of semiconductors, competing against electronics and electrical goods makers - from TVs and mobile phones to cars and games consoles.

Pendragon, the UK car dealership group, has flagged this morning that supplies are likely to be hit in the second half of this year, with some orders already being delayed.

Pendragon told the City that:

There remains continued uncertainty as we move in to the second-half of FY21 with potential further disruption from Covid-19, an expected realignment of used vehicle margins and the risk of both new and used vehicle supply constraints.

Whilst the extent of the impact of the well-publicised semi-conductor chip shortage is not yet clear, it is becoming increasingly apparent there is likely to be some restriction of supply during the second-half of FY21, with vehicle order times already being extended.

The agenda

• 8.55am BST: German unemployment for June
• 10am BST: Eurozone inflation reading for June
• Noon: Bank of England chief economist Andy Haldane speech at the Institute for Government on the changes in central banking over the last 30 years
• 1.15pm BST: ADP survey of US employment in June
• 3.30pm BST: IEA weekly oil inventory figures