UK GDP falls short of expectations in August

Chris Scicluna
Emily Nicol

US equities higher on stimulus hopes; Chinese equities re-open stronger; rest of Asia mixed
With investors becoming more confident of further US fiscal stimulus – albeit perhaps mostly after the election – the US equity market continued to make gains on Thursday, with the S&P500 closing up 0.8% and at a 5-week high. In the bond market Treasury yields declined slightly from the previous day’s high but remained around the new break-out high reached at the beginning of the week. The ‘risk-on’ environment also resulted in further losses for the Greenback, especially against the yen and the commodity-based currencies. And US equity futures have continued to move higher since Wall Street close, with the S&P500 minis rising about 0.5%. This has followed reports suggesting that, by rejecting a piecemeal approach to fiscal stimulus, House Speaker Pelosi may have successfully called President Trump’s bluff. According to a Pelosi spokesperson, Treasury Secretary Mnuchin told her in a call that Trump would still consent to an agreement on a comprehensive stimulus deal. That said, it remains unclear that the Administration is prepared to go as far as the US$2.2trn package proposed by the Democrats.

Turning to developments in the Asia-Pacific region, the main gains were seen in China, where markets reopened following the 8-day Golden Week holiday. With global sentiment having lifted over the holiday period, and with investors being greeted today by another positive data surprise – this time from the Caixin services PMI – the CSI300 firmed by 2.0%. At the other end of the spectrum, Japan’s TOPIX fell 0.5%, probably not helped by the stronger yen. Finance Minister Aso told reporters that while it was very important to get the economy back on track, next year’s budget needs to balance support for the economy while being fiscally sound. And today’s Japanese labour earnings figures remained weak (see below). In other regional news, the RBI’s MPC finally met and left its policy rates unchanged as expected. However, it announced a number of other measures to boost the economy, including new loans to banks to allow them to buy corporate bonds.

In Europe, govvies have opened higher, despite some broadly positive French manufacturing production figures. The cause might well be the UK’s monthly GDP data, which fell well short of expectations in August despite the boost from various government incentives, and implied that the economy was on track for a weaker rebound in Q3 than assumed by the BoE at its most recent MPC meeting. Against this backdrop, BoE Chief Economist Haldane’s appearance at an OECD conference today might attract some attention.

Japanese labour income still weighed by a decline in overtime
Yesterday the BoJ’s Regional Economic Report noted widespread weakness in the labour market and household incomes. This was very confirmed today by the preliminary results of the MHLW Monthly Labour Survey for August, albeit with the results not quite as weak as last month. According to the survey, average labour cash earnings (per employee) declined 1.3%Y/Y in August – an outcome that was slightly worse than market expectations and which followed a revised 1.5%Y/Y decline in July (previously reported as a decline of 1.3%Y/Y). And after accounting for inflation, the decline in real wages in August was a slightly larger 1.4%Y/Y.

As has been the case since April, these figures remain depressed by a slump in overtime earnings. Average overtime earnings fell a substantial 14.0%Y/Y, but this was less than the 17.1%Y/Y decline reported in July. Overwhelmingly, the decline in earnings reflects a reduction in overtime hours worked, which fell 13.1%Y/Y despite a 2.7%M/M increase in August (a second consecutive monthly increase but coming after heavy declines, especially in April and May). That said, regular earnings also fell 0.1%Y/Y in August – the first decline in 14 months – with average regular hours worked declining in August and so falling 4.3%Y/Y. While total hours worked (per employee) fell 5.0%Y/Y, the number of people in regular employment rose 0.3%M/M – the second consecutive such increase – and so was up 0.8%Y/Y (up 0.2ppts from July). In the detail, the number of full-time employees increased 1.8%Y/Y (up 0.2ppts from last month) but the number of part-time employees fell 1.3%Y/Y (an improvement of 0.1ppts). Finally, it is worth noting that all of the pick-up in regular employment in August occurred outside of the manufacturing sector.

Household spending up again, but incomes slow as support payments fade
In other news, the MIC released its monthly survey of household spending and incomes for August. After declining 6.5%M/M in July – albeit after a 13.0%M/M rebound in June – the survey reported that real household spending rose 1.7%M/M in August. This outcome is in the same direction as suggested earlier in the week by the BoJ’s Consumption Activity Index, which is a more reliable indicator of the national accounts measure of private consumption. Even with the pick-up this month, spending remained down 6.9%Y/Y – only a modest improvement on the 7.9%Y/Y decline reported in July but still a vast improvement on the 16.2%Y/Y decline recorded when spending troughed in May. MIC’s measure of core spending, which excludes spending on volatile components such as housing and autos, fell a slightly smaller 5.9%Y/Y recorded in August. Meanwhile, the surveys measure of workers’ real disposable incomes rose just 0.8%Y/Y in August – a far cry from the 11.7%Y/Y increase reported in July – suggesting that payments to households made as part of the government’s pandemic relief package have now more-or-less run their course. However, it seems reasonable to suppose that past payments might provide some ongoing support to spending once worries about the pandemic begin to subside.

UK GDP falls well short of expectations, suggesting BoE was overoptimistic
At its September policy meeting, the BoE’s MPC judged that recent data had been stronger than it had anticipated when it published its most recent economic forecasts in the August Monetary Policy Report. However, today’s GDP data for August suggest that the opposite is the case, with a significant downside surprise to growth suggesting that the BoE will need to revise down its profile for economic output when it produces new projections next month.

In particular, while it rose for the fourth successive month in August, GDP increased only 2.1%M/M, the weakest rate since the ending of national lockdown restrictions and less than half the median forecast on the Bloomberg survey. While that left economic output 21.7% above its April trough, it was still 9.2% below the pre-lockdown February level. And following slightly downwardly revised growth of 6.4%M/M in July, the BoE’s central projection of growth of 18%Q/Q in Q3 would require a marked acceleration to about 7%M/M in September. Given the termination of the government’s Eat Out to Help Out scheme at end-August, and the gradual revival of the pandemic over recent weeks which has seen a softening in high-frequency data, that would seem completely unfeasible. A growth rate similar to that of August – which would leave GDP up about 16%Q/Q in Q3 – might even seem a stretch too.

Indeed, the government’s temporary subsidies for the hospitality sector, coupled with increased “staycation” summer holidays due to international travel restrictions, were clearly the main driver of GDP growth in August. Output from the food service and accommodation sector rose an extraordinary 71.4%M/M to account for 1.25ppts of the increase in overall output. Among other sub-sectors, education also chalked up strong growth of 6.5%M/M, although that reflected the technical assumption of the ONS which smoothed the profile of activity from July, when most pupils were still unable to attend classes, to September, when schools fully reopened following the summer holidays.

With many other sub-sectors subdued (e.g. activity in wholesale, retail and motor trades fell 0.2%M/M), total services output rose just 2.4%M/M in August, to be 9.6% below the February level. Meanwhile, manufacturing output slowed to just 0.7%M/M, from upwardly revised growth of 6.9%M/M in July, to be still 8.5% below its pre-lockdown level. And while construction output rose 3.0%M/M, it was still 10.8% below the February level. Strikingly, in only 3 of the 20 main sub-sectors of the economy – energy, water and public administration/defence – was output above its February level.

French industrial recovery boosted by autos production
The data focus in the euro area today will be on various member state IP releases, including from France and Italy. In contrast with the notably softer than expected outturns from Germany and Spain earlier in the week, the French figures (just released) suggested that the manufacturing recovery was maintained in August. Admittedly, the increase in total industrial production (1.3%M/M) was notably softer than seen over recent months, which had seen a cumulative rise of 40% in the three months to July. And while more than 80% of the initial post-lockdown slump had been recovered, output was still more than 6% below February’s peak. The increase in manufacturing was somewhat more modest (1.0%M/M), to leave it still almost 7½% below the pre-pandemic level.

Within the manufacturing detail, there was significant variation among subsectors. For example, production of transport equipment (+5.9%M/M) was boosted by a further rise of more than 18%M/M in autos output (albeit leaving the level still 18½% lower than February’s peak). In contrast, production of machinery and equipment goods fell back as did manufacturing of food products. But unlike in Germany, today’s French figures reported strong growth in construction, where output rose 4.9%M/M in August, to leave it just 1.2% below February’s peak. Indeed, in the first two months of Q3, French construction activity was on average 40% higher than the Q2 average, while manufacturing was up almost 22% on the same basis, not least boosted by a near-68% rise in production of consumer durables.

Italian figures due later today are also expected to show that output rose around 1½%M/M in August. Meanwhile, the Dutch manufacturing figures (released earlier this morning) missed expectations, rising 0.7%M/M following growth of 3.9%M/M in July. And so, industrial output in the Netherlands was still more than 4½% lower than the pre-pandemic level.

China’s Caixin services PMI strengthens more than expected in September
Investors received another positive data surprise in China today, with the Caixin services PMI rising a greater-than-expected 0.8pt to 54.8 in September – a better-than-average reading that supports the robust findings of the official PMI survey. In the detail the new orders index rose 0.9pt to 53.6 and the future activity index rose 0.6pt to 59.3. The employment index also firmed marginally to the highest reading since November last year. The inflation news was slightly softer, however, with the output prices index falling 0.5pt to 50.7 – still the second-highest reading this year and marginally above the average reading for the survey. Combining today’s news from the service sector with earlier news from the manufacturing sector, the Caixin composite output index fell 0.6pt to 54.5 in September, reflecting a pullback in the manufacturing index from what had been close to a 10-year high.

RBA sees substantial financial system risks but expects resilience
Today the RBA released its six-monthly Financial Stability Review. The report noted that after a period of heightened volatility and stress in February and March, financial systems have continued to operate effectively. Looking forward, given an expectation that the global economic recovery is going to take time and will be uneven, the focus for the Bank has shifted from liquidity to the solvency of borrowers as expected defaults will result in credit losses for lenders. And on that score, the Bank seems wary of a potential decline in asset prices and a re-widening of credit spreads, with the return of these to pre-pandemic levels viewed as being at odds with the outlook for the economy and defaults. However, the Bank did continue to take comfort from the fact that local banks had entered the pandemic with substantially higher levels of capital and liquid assets than prior to the GFC, which to date has enabled them to absorb the shock. And non-bank parts of the financial system were also said to have withstood the impact of the pandemic, albeit helped by the rebound in asset prices.

That balance sheet strength has allowed financial institutions to actively assist customers by deferring loan repayments. But looking ahead, the RBA cautioned that banks will need to deal carefully with the loans of borrowers who will not be able to resume repayments, balancing the avoidance of further losses to the bank, with the interests of the borrower and the potential for spillover effects from any sales of collateral. While most households are said to be faring well – and while credit is available at very low interest rates – the RBA argued that reduced housing demand from very low immigration and the rise in unemployment contribute to the risk of a continuation of the house price declines that had begun at the onset of the pandemic.

The RBA believes that commercial real estate also poses significant risks for lenders and leveraged investors, reflecting both the economic downturn and changing expectations regarding future office use. Industrial property is viewed as less of risk due to the rise of online shopping. Overall, while the risks to the financial system are elevated – and would rise further if the economic recovery was impacted by setbacks on the health front or international political tensions – the RBA argues that banks would likely remain above their minimum capital requirements even if the economic contraction is substantially more severe than envisaged currently.

In other Aussie news, and in contrast to the RBA’s fears, data released today by the ABS indicated that the appetite for housing loans has continued unabated in August. Indeed, the value of new home loan approvals (ex-refinancing) increased a stunning 12.6%M/M in August despite the lockdown in Melbourne, with approvals for lending by owner occupiers rising 13.6%M/M and those for investors rising 9.3%M/M. As a result, the number of new loans was up a whopping 19.3%Y/Y, with a 29.2%Y/Y lift in approvals for owner-occupier loans swamping a 4.6%Y/Y decline in approvals for loans by investors. And new housing loan approvals have now surpassed pre-pandemic levels to reach the fastest pace since January 2018.

Inventories to mark a quiet end to the week for US data
A quiet end to the week for US economic releases will bring just wholesale trade and inventories data for August. 

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