UK consumer confidence edges up, government debt chalks up another record

Chris Scicluna
Emily Nicol

Asian equities up small Friday after Wall Street erases early losses
Wall Street put the previous day’s heavy losses behind it yesterday, perhaps helped by news that House Democrats had begun to draft a new US$2.4trn fiscal stimulus bill that might form the basis for further discussions with the White House and Senate Republicans. But given significant doubts such an amount would be gain approval – with Republicans looking to cap spending at US$1.5trn – the gain on Wall Street was understandably modest. After initially opening lower, the S&P500 eventually closed with a gain of 0.3%. But US (and European) equity futures have moved a little higher since New York went home, while USTs have been little changed, as are euro area govvies so far this morning.

Against that background, on a light day for economic news from the region, equity markets generally also moved a little higher across the Asia-Pacific region today. Some of the largest gains were again seen in Australia, where the ASX200 rose 1.5% – and most of the major banks by at least 5% – after the Government announced that it would ease the requirement on banks to verify the credit-worthiness of borrowers (more on this below). In Japan the major indices climbed about ½%, perhaps also taking some heart from news that the Government will ease entry restrictions imposed on foreign arrivals on a global basis from 1 October. Slightly smaller gains have been seen in China, where the positive news that the country’s debt will be added to the FTSE Russell Global Bond Index next year was countered somewhat by news of a trading halt on the bonds of Chinese developer Evergrande, with the bonds plunging after the company warned of a potential default if it doesn’t get approval for a stock exchange listing.

UK consumers slightly happier; public borrowing chalks up another record
Despite the resurgence in coronavirus cases, increasing localised lockdowns and a deteriorating labour market outlook, today’s flash GfK consumer confidence survey indicated a further modest improvement in sentiment this month, with the headline balance rising 2pts to -25, the highest reading since March and 11pts above the post-pandemic trough. This, however, still remains 18pts lower than the peak reached earlier this year. And having been conducted during the first fourteen days of the month and therefore before the reintroduction of new national restrictions on activity, this might well be revised lower in due course.

Indeed, within the details, households were seemingly more upbeat about their expectations for the economic situation over the coming twelve months, with the relevant index only marginally weaker than this time last year. As such, households assessed it to be a slightly improved environment to make major purchases too. But while this component has risen considerably from the post-Covid outbreak low, it still remains more than 24pts below its level a year earlier. And with unemployment set to rise despite the Chancellor’s unveiling yesterday of a (less generous) new job support scheme, we very much doubt that consumers will feel significantly more optimistic heading into the final quarter of the year. And that seems highly likely to weigh on consumption.

The hit to the public finances from the pandemic was highlighted in this morning’s other UK data. Public sector net borrowing (excluding public sector banks) was estimated at £35.9bn in August, up £30.5bn from a year earlier, inevitably a record for the month. Indeed, it represented the third highest government borrowing in any month, after the extraordinary blowouts in April (£56.0bn) and May (£50.6bn). And it left total borrowing in the first five months of the financial year (April to August) at £173.7bn, up £146.9bn on the same period last year and unsurprisingly the highest borrowing for the period on record.

The central government net cash requirement (CGNCR) came in at £21.7bn in August, up £16.1bn on the same month last year. And that took the CGNCR in the current financial year-to-date to £221.2bn, more than 11 times the equivalent level in 2009, which previously held the record. Public sector net debt rose to around 101.9% of GDP.

Weaker receipts on VAT, corporation and income tax explain a little less than a quarter of the increase in borrowing. So, much higher central government spending has been the main driver, up almost £20bn from a year earlier, with spending on the Government’s two job support programmes – the Coronavirus Job Retention Scheme (CJRS, £6.1bn) and the Self Employment Income Support Scheme (SEISS, £4.7bn) making a substantive contribution.

The Government’s new Job Support Scheme, to run for six months from 1 November, will subsidise the incomes of employees working reduced hours. While firms will continue to pay their employees for time worked, part of the cost of the hours not worked will be borne by the Government. It’s far from clear how many workers will benefit from the scheme. But this morning’s update from the Business Impact of Coronavirus Survey suggested that 12% of the workforce – roughly 3mn workers – were on partial or full-time furlough between 24 August and 6 September. And the total cost of the scheme for the Government could well surpass £10bn.

Japanese services price inflation remains soft, labour earnings revised down
Completing its suite of monthly inflation reports, today the BoJ released its services PPI report for August. The overall index fell 0.1%M/M in March, lowering the annual rate of inflation by 0.1ppt to 1.0%Y/Y (or, more tellingly, -0.8%Y/Y when the impact of last year’s consumption tax hike is excluded). Unsurprisingly, key contributors to the decline of annual inflation were hotel charges (down a whopping 38.3%Y/Y in August) and domestic airfares (down 10.3%Y/Y).

Meanwhile, the MHLW released the final results of its Monthly Labour Survey for July. Total labour cash earnings declined 1.5%Y/Y – an outcome that was 0.2ppt weaker than first reported – following an unrevised 2.0%Y/Y decline in June. Both overtime earnings (now down 17.1%Y/Y) and scheduled earnings (now up just 0.2%Y/Y) were slightly weaker than first reported. These revisions reflected a downward assessment of hours worked, with overtime hours now down 16.2%Y/Y and regular hours down 1.7%Y/Y. While total hours worked are now estimated to have declined 2.7%Y/Y, the number of people in regular employment still rose an unrevised 0.6%Y/Y. That resilience reflects a 1.6%Y/Y increase in full-time employment, with part-time employment down 1.4%Y/Y.

Australia aims to speed up consumer lending; exports and imports weak
The key news impacting markets in Australia today was the Government’s announcement of proposed reforms to the obligations facing lenders when approving consumer credit. According to the Government the previous ‘responsible lending obligations’ are no longer ‘fit for purpose’. In particular, the Government argued that these obligations risk slowing the economic recovery due to causing delays in credit approvals and higher borrowing costs. A key feature of the proposed new obligations will be to allow lenders to rely on the information provided by borrowers, unless there are reasonable grounds to suspect it is unreliable, thus speeding up the loan approval process. Moreover, it is intended that the approval process be less prescriptive than was the case previously, with the process tailored to the applicants’ circumstances. Needless to say, easing lending standards during a recession is not without risk and the Government has said that will consult publicly with stakeholders before finalising any legislation required to implement the reforms.

The only economic reports released in Australia today concerned the performance of the external sector. Of particular note, continuing its effort to produce timely data in the wake of the pandemic, the ABS released its preliminary estimates of the goods portion of the trade balance for August. These data, only presented in original (i.e. non-seasonally adjusted) form, pointed to a 2%M/M decline in exports during August, leaving them down 16%Y/Y – the latter a similar rate of decline to that reported in July. The decline in exports in August owed to a fall in non-monetary gold, which had reached a very high level in July. However, the annual decline in exports is mainly due to a decline in exports of gas and coal.

Meanwhile, imports are estimated to have declined an even greater 7%M/M in August and were down 7%Y/Y – the latter a weaker outcome than in July, but not dissimilar to that seen in previous months. The fall in August was led by reduced imports of capital equipment, but the annual decline in imports was largely driven by intermediate goods – especially petroleum, not least due to lower prices. Taken together these results point to a merchandise trade surplus of around A$4.3bn in August, down from A$7.0bn a year earlier. The final trade report, which will also include information from the services sector, will be released on 6 October.

The ABS also released its estimate of the impact of the pandemic on employment in the tourism sector during Q2. The number of filled jobs in the sector fell 12.9%Q/Q and was down 15.1%Y/Y – three times as large as the average decline in filled jobs across the economy. Not surprisingly, the largest declines were in the sport and recreation (-39.7%Y/Y) and accommodation (-26.5%Y/Y) categories.

Euro area bank loans, Italian sentiment and US durable goods data to come
After yesterday’s ifo and INSEE business sentiment surveys from Germany and France suggested that the loss of recovery momentum has not been quite as severe as the flash PMIs suggested, the data focus this morning turns to Italy, where manufacturing and consumer confidence data for September are scheduled for release. While the spread of Covid-19 in Italy appears much better under control than in most other European countries, consumer confidence is expected to have moved broadly sideways, after regaining some ground in recent months. And following the trend in Germany and France, manufacturing confidence is expected to rise further, leading the recovery.

Also due later this morning are euro area M3 money supply figures for August, which are likely to report continued solid growth in lending, as banks support corporate sector liquidity and provide increased funding for house lending. Yesterday’s solid take-up from the ECB’s TLTRO-iii operation should support ongoing steady lending growth over coming months, which itself should ensure that most banks benefit from the bonus -1.0% interest rate on those funds.

In the US, with manufacturing sector recovery ongoing, durable goods orders are expected to have advanced for a fourth successive month in August, albeit at a significantly softer pace that the average of more than 11% from May to July. Daiwa America’s Mike Moran projected growth of just 0.5%M/M, leaving some way to go to reverse the shortfall from the pre-pandemic level. 

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