UK GDP falls less than expected in January

Chris Scicluna

US equities hit new highs as Biden’s fiscal stimulus signed into law
With President Biden speedily signing his American Rescue Plan into law, the US equity market rallied to new highs yesterday. At the close the S&P500 was up 1.0% – albeit 0.5ppts off its session high – while the recently unloved Nasdaq found even greater favour with a 2.5% gain. After trading below 1.50% in European time ahead of dovish commentary and a signal of accelerated bond purchases to come from the ECB, the 10Y UST closed at 1.53% despite steady demand at the 30Y auction, with the loss contrasting with the gains in euro govvies. And since the close, US Treasury yields have increased further – the 10Y UST above 1.59% to approach Monday’s highs as we write – to weigh on equities, after President Biden announced that the US is on track to vaccinate 100m Americans during his first 60 days of office, 40 days sooner than he had pledged. Biden also announced that he had directed states to make all adults eligible for vaccination from 1 May and pleaded with Americans to make themselves available for jabs when called (sufficient vaccines are expected to be on hand by the end of that month to vaccinate the entire adult population).

Against that background, it was a somewhat mixed session for Asian equities today, especially with there being very little in the way of local macro dataflow or news. Most interest continued to centre on trading in China’s equity market, where yesterday’s 2.5% rally was initially partly unwound. However, the CSI300 later closed fractionally higher despite reports that the Biden administration had advised US suppliers to China’s Huawei that conditions had been tightened on some previously-approved export licenses. Stocks fell more than 2% in Hong Kong as investors continued to digest China’s NPC resolution setting principles for the future amendment of the electoral system that would ensure that future candidates to the Legislative Council are “patriots”. By contrast, in Japan the TOPIX rallied 1.4% as the MoF’s Business Outlook Survey indicated that firms were looking forward to a better FY21. There was little reaction to a Mainichi newspaper report suggesting that at next week’s meeting the BoJ’s Board might scrap its previous ¥6trn annual target for ETF purchases – thus allowing purchases to be made on a more flexible basis – while keeping the expanded ¥12trn ceiling for purchases that was announced as part of the Bank’s pandemic response. JGB yields moved slightly higher, however. Meanwhile, the bounce in tech stocks benefitted the KOSPI, which advanced 1.3%.

UK GDP drop of 2.9%M/M in January is less severe than expected, even as exports to the EU post record drop of more than 40%M/M
Gilts have followed USTs lower this morning, not helped by the latest slug of UK economic data – as pandemic containment restrictions were tightened, the drop in economic output in January was not quite as sharp as had been feared. Nevertheless, following growth of 1.2%M/M in December, GDP fell a non-negligible 2.9%M/M at the start of the year to be 9.0% below the pre-pandemic level in February 2020 and 4.0% below the initial recovery peak last October. Services activity fell 3.5%M/M weighed by renewed declines in consumer-facing services (including retail and hospitality) and education, with healthcare (including vaccinations and test-and-trace) providing some offset. That left services activity down 10.2% from the pre-pandemic level and 4.9% below October’s peak. Production sector activity fell 1.5%M/M as manufacturing output dropped 2.3%M/M, marking the first decline since April. So, manufacturing output was still 5.0% below the February 2020 level. But construction activity provided modest offset, rising 0.9%M/M in January albeit still 2.6% below the pre-pandemic benchmark.

January’s trade data, meanwhile, highlighted the impact of the end of the Brexit transition, which prompted the steepest monthly declines in exports and imports on the series dating back to 1997. Goods exports (excluding non-monetary gold etc.) fell by a hefty £5.3bn (19.3%M/M) due to a plunge of £5.6bn (40.7%M/M) in exports to the EU. Goods imports on the same basis fell by £8.9bn (21.6%M/M) due to a drop of £6.6bn (28.8%M/M) in imports from the EU, with chemicals, pharmaceuticals and cars particularly affected.

Goods imports from non-EU countries also declined markedly in January, down £2.4bn (12.7%M/M) while exports beyond the EU edged up £0.2bn (1.7%M/M). Meanwhile, imports of services fell just £0.3bn (2.4%M/M) while exports of services fell £0.2bn (0.9%M/M), with travel, other business services and transport most affected. So, despite the whack to shipments to the EU, the total trade deficit (excluding non-monetary gold etc.) narrowed by £3.7bn to £1.9bn, with the decline in total imports of £9.2bn (17.6%) exceeding the drop in total exports of £5.5bn (11.8%M/M). Given the marked volatility in prior months, however, the total trade deficit on a three-month basis widened by £6.7bn to £12.8bn with imports up £2.4bn (1.7%3M/3M) but exports down £4.3bn (3.1%3M/3M).

Japan’s MoF Business Outlook Survey points to softer Q1, but increasing optimism thereafter
With next week’s BoJ Board meeting now looming large, the domestic focus in Japan today was on the MoF’s Business Outlook Survey, which usually provides a good directional predictor of key indicators in the more widely-followed and comprehensive BoJ Tankan survey – the next instalment of which will be released on 1 April. In summary, the MoF survey points to less favourable business conditions – especially domestic business conditions – in the non-manufacturing sector over the past three months due to the disruption caused by the winter surge in coronavirus cases, while the previous quarter’s reported significant improvement in business conditions in the manufacturing sector was not repeated. On net, only a relatively small percentage of firms in each sector expect conditions to improve further over the coming quarter, but a slightly larger percentage expect improved conditions in Q3. And the survey points to a much-improved outlook for sales, profits and capex in FY21.

Turning to the key figures, in net terms, around 5% of large firms reported weaker business conditions in Q1, with improved conditions cited by just 2% of manufacturers – down from 22% in the prior survey – and weaker conditions cited by 7% of non-manufacturers. Improved conditions in international markets clearly provided a buffer against much weaker conditions domestically. Indeed, a net 22% of large firms reported weaker domestic economic conditions in Q1, with 9% of manufacturers and 29% of non-manufacturers citing a deterioration. As always, the experience of medium- and especially small-sized firms was significantly worse than that for larger firms. For example, a net 53% of small firms cited a deterioration in domestic economic conditions in Q1. Despite the downturn, the extreme tightness of the labour market prior to the pandemic means that a net 9% of large firms reported labour shortages in Q1, slightly more than in the prior quarter. That shortage was restricted mainly to non-manufacturers, with manufacturers remaining largely satisfied with staffing levels.

Looking ahead, on net a somewhat disappointing 3% of large firms indicated that they expected business conditions to improve over the coming quarter, with that limited optimism shared equally by manufacturing and non-manufacturing firms. Naturally, that improvement appears to be driven by an expected improvement in domestic conditions, which is anticipated by around 7% of large firms. Large firms are more confident that conditions will improve in the subsequent quarter, with around 7% expecting an improvement in overall conditions and 11% expecting an improvement in domestic business conditions. As a result, firms anticipate that labour market conditions will remain relatively tight over the coming two quarters.

Elsewhere in the survey, respondents also provided their final estimate of expected sales, profits and capex for FY20 as well as their first tentative forecasts for FY21. Regarding the almost completed FY20, firms now expect that sales will contract 7.1%Y/Y, compared with 7.5%Y/Y in the previous survey. Ordinary profits are forecast to slump just over 20%Y/Y, but this compares favourably with the almost 25%Y/Y decline forecast in the prior survey. Reflecting the steep declines observed in the middle two quarters of last year, firms forecast that spending on plant and equipment and software will decline 9.2%Y/Y in FY20 – slightly worse than the 7.6%Y/Y decline indicated in the prior survey. Encouragingly, the outlook for FY21 appears more upbeat.

Led by a predicted 5%Y/Y increase in the manufacturing sector, business sales are forecast to rise 3.2%Y/Y. Ordinary profits are forecast to increase 8.8%Y/Y, led by a near 17%Y/Y rebound in the manufacturing sector. By contrast profits are expected to rebound just 6.4%Y/Y in the non-manufacturing sector following a more than 19%Y/Y decline in FY20. Meanwhile, spending on plant and equipment and software is forecast to rebound 7.6%Y/Y, with similar expectations for growth held in the manufacturing and non-manufacturing sectors despite their differing expectations regarding profits – likely explained by the persistent labour shortages that are expected in the non-manufacturing sector.

Euro area IP figures to come after final German inflation data confirm flash estimates
Today will bring euro area industrial production figures for January. While production (excluding construction) dropped in Germany and Spain at the start of the year, it rose in Italy, the Netherlands and France, with growth in the latter a particularly firm 2.5%M/M. As a result, IP in the euro area as a whole should have grown by ½%M/M or more. That, however, would still leave it down roughly 2%Y/Y. Meanwhile, the final German inflation figures for February confirmed the flash estimates, with inflation on the EU-harmonised HICP measure unchanged at 1.6%Y/Y. The equivalent Spanish figures are also due this morning, with the flash HICP estimate having dropped 0.5ppt to -0.1%Y/Y.

February PPI and March UoM consumer sentiment data to close out the week in the US
This week’s US economic diary will draw to a close today with the release of the PPI for February and preliminary data from the University of Michigan’s consumer survey for March. As far as the former is concerned, Daiwa America Chief Economist Mike Moran expects this to mimic Wednesday’s CPI report, with higher energy prices expected to lift the headline PPI by a solid 0.4%M/M which, given base effects, will likely boost annual inflation to 2.7%Y/Y – a level not seen since 2018. However, after an outsized 1.2%M/M jump last month, he expects the core measure to be flat this month, which will nonetheless lift inflation by a at least a couple of tenths from last month’s reading of 2.0%Y/Y. Meanwhile, the sentiment indices in the University of Michigan’s consumer survey which should benefit from a sharp decline in coronavirus cases and the anticipation of President Biden’s fiscal stimulus.

Kiwi manufacturing PMI softens in February, but still consistent with decent expansion
After rebounding to a 6-month high in January, the BNZ-Business NZ manufacturing PMI fell 4.6pts to 53.4 in February – not an unexpected development in light of the restrictions on activity imposed on two occasions over the past month, and still leaving the index slightly above its long-term average. In the detail, the production index fell just 2pts to a still sturdy 57.3 but the new orders index fell 6.6pts to 56.2. Meanwhile, after last month hitting the highest level in four years, the employment index fell 6.3pts to 49.8. In other Kiwi news, with no community cases of coronavirus discovered over the past fortnight, all restrictions on activity in the Auckland region were removed today, bringing the region back into line with the rest of the country.

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