UK GDP rebounds strongly in Q2

Emily Nicol

Markets mixed again in Asia today; UST’s erase post-CPI rally
The S&P500 managed a further ¼% gain to a new record high on Wednesday, buoyed by a 0.3%M/M lift in the core CPI that was a touch weaker than analysts had expected. But with the CPI still showing some signs of firmness in the detail, a kneejerk 5bps rally in the 10Y note to a low of 1.30% was already partially unwound by the time US markets closed and has since been erased fully in Asian trading. The greenback lost ground following the CPI release and has failed to recover despite bond yields returning to pre-CPI levels.

Against that background, it has been another mixed day in Asian markets. In China, the CSI300 is presently down around 0.9%, which follows yesterday’s release of weaker than expected July credit data and a State Council/CCP Central Committee document foreshadowing a further push to increase regulation. By contrast, the TOPIX was stable in Japan, notwithstanding another 4,200 new virus cases in Tokyo and unsurprising reports that the state of emergency there and elsewhere will likely be extended into September. Markets have also advanced modestly in Singapore, but are weaker in South Korea where consideration is being given to further tightening social distancing guidelines.

In the Antipodes, Australia’s ASX200 was fractionally stronger despite Canberra becoming the latest Australian city to be placed into a snap seven-day lockdown following the discovery of the first case of the virus in the community in more than a year. Moreover, with a further 345 new cases being reported in New South Wales, and so restrictions tightened further in three more localities, AGCB yields have moved lower. Equities have also weakened slightly in virus-free New Zealand, where the government announced an accelerated vaccination plan and proposal to begin a phased reopening of the border from early next year.

Japan’s PPI inflation rate unexpectedly rises to a new high in July as commodity prices continue to increase; Tokyo office vacancy rate continues to rise, driving rents lower
The main economic report of note in Japan today was the goods PPI for July, which surprised analysts to the upside for a fifth consecutive month. Indeed, excluding movements associated with changes in the consumption tax, the 1.1%M/M lift in prices was the largest since 2008 and more than double the consensus expectation. As a result, the annual PPI inflation rate increased an unexpected 0.6ppt to 5.6%Y/Y – also the highest since 2008. A strong contribution to this month’s increase came from higher prices for electricity, with the utility index rising 4.5%M/M but still down 1.3%Y/Y. However, the PPI for manufactured goods still increased a solid 0.8%M/M, lifting annual inflation by 0.3ppt to a new high of 5.7%Y/Y. Once again, the key driver of the increase in prices for manufactured goods was higher commodity prices. Of particular note was a 4.3%M/M increase in the price of energy products (up almost 39%Y/Y) and a 7.8%M/M increase in lumber prices (now up over 33%Y/Y). Prices for chemicals, metal products, and iron and steel all increased by at least 1%M/M in July. As in previous months, prices for imported products increased more rapidly than for domestic products, with the former rising 1.8%M/M and the latter rising 1.0%M/M. Indeed, measured in yen, import prices increased to the highest level since November 2018, and so were up almost 28%Y/Y. However, final consumer goods prices increased just 0.3%M/M in June, with domestic and imported prices rising similarly – so that annual inflation declined 0.1ppt to 3.2%Y/Y. And of course, goods prices at the CPI level are inflating at nowhere near that rate, with retailers either unable or unwilling to pass on the rise in input costs (at least at this stage).

In other news, reflecting the ongoing impact of the pandemic – which may yet prove to include a more persistent change in working habits – the office vacancy rate in the Tokyo business area increased a further 0.09ppt to 6.28% in July, marking the highest level since July 2014 and well above the long-run average (5.4%). Not surprisingly, the rising vacancy rate is continuing to weigh on office rental rates, which for buildings more than a year old fell a further 0.4%M/M in July – the twelfth consecutive decline – with rates now down a cumulative 8.1% from the July 2020 peak.

China’s credit provision slows in July; stock growth now back at pre-pandemic levels
There were no economic reports of note in China today. However, late yesterday the PBoC released credit and money growth data for July, which was quite a bit softer than market expectations (albeit following a strong burst in June). Aggregate financing grew just CNY1.06trn in July, which was CNY0.64trn less than the consensus expectation and similarly below the pace of growth in July last year. As a result, annual growth in the total stock of aggregate financing declined to a 17-month low of 10.7%Y/Y, which brings growth back into line with the average rate reported in the year leading up to the pandemic. Bank lending grew a similar CNY1.08trn, which was also slightly less than market expectations but slightly above that recorded in July last year, so annual growth in the stock of bank loans edged down to 12.4%Y/Y. With regard to the monetary aggregates, growth in M1 eased a further 0.6ppt to a lower than expected 4.9%Y/Y, while growth in M2 also eased an unexpected 0.3ppt to 8.3%Y/Y – perhaps a bit slower than the PBoC would like to see given its target for nominal GDP growth.

UK GDP grows a solid 4.8%Q/Q in Q2; output in June was just 2.2% below pre-pandemic level
Broadly in line with expectations, the preliminary estimate of UK GDP in Q2 reported solid growth of 4.8%Q/Q. This left output up a whopping 22.2%Y/Y (admittedly flattered by the low base last year), but still 4.4% below the pre-pandemic level in Q419. With lockdown restrictions having gradually eased throughout the second quarter, however, the monthly profile was more encouraging, with output having risen for the fifth consecutive month in June (1.0%M/M), to leave it just 2.2% below the February-2020 level. And despite the downside risks from the surge in coronavirus cases at the start of Q3, on the whole indicators point to ongoing recovery particularly in the services sector which continues to benefit from the lifting of the final lockdown restrictions in July. And so we expect the pre-pandemic level to be surpassed in the current quarter.

The acceleration in GDP in Q2 was due principally to the reopening of the services sector, with consumer-facing activities surging. In particular, accommodation and food services jumped 87.8%Q/Q, while wholesale and retail trade increased by 12.8%Q/Q. There was also a notable increase in education output (19.4%Q/Q) reflecting the reopening of schools. Overall, services output rose 5.7%Q/Q in Q2, to be 3.5% below Q419 levels. Industrial production rose ½%Q/Q in Q2, merely reversing the decline in Q1 as output of transport equipment remained a notable drag. Indeed, production of motor vehicles fell for the second successive quarter and by a substantial 16.7%Q/Q, as the global semiconductor shortage disrupted supply chains. (More encouragingly, production of transport equipment rose 7.4%M/M in June.) Overall, industrial production remained 3.3% below the Q419 level, with auto production still almost one quarter below the pre-pandemic level. Meanwhile, construction output rose 3.3%Q/Q in Q2 to leave it just 0.6% below the pre-pandemic level. 

On the expenditure side, with increased opportunities to spend, household consumption accounted for much of the quarterly increase in GDP, rising 7.3%Q/Q in Q2 as spending on hospitality and transport accelerated with the easing of restrictions. But this still left consumption 7% lower than in Q419. Business investment also improved, although the 2.4%Q/Q increase still left it more than 15% below the pre-pandemic levels. But a notable decline in public sector activity saw total fixed investment fall modest ½%Q/Q in Q2. Given the test-and-trace and vaccination programmes, as well as a pickup in non-Covid-related health activity, and increased education services, government consumption remained supportive, rising 6.1%Q/Q. Meanwhile, with imports (up 6.5%Q/Q) outpacing exports (up 3.0%Q/Q), net trade subtracted 0.9ppt from GDP growth in Q2. 

Euro area IP likely to have moved sideways in June
Today’s euro area data focus will be June industrial production. While manufacturing output increased in France and Italy, it declined in Germany and Spain, with the weakness in particular driven by the autos sector which continues to suffer from supply bottlenecks. So, overall, we expect euro area industrial output to have moved broadly sideways in June, to leave it down very marginally over the second quarter as a whole. It will be particularly interesting to see how production in the autos sector evolved having declined a cumulative 28% since last November.

Inflation to remain the focus in the US today
Following yesterday’s CPI report, the focus in the US today will remain on inflation with the PPI report for July being the main diary entry of note. Daiwa America’s Mike Moran is looking for 0.5%M/M and 0.4%M/M increases for the headline and core indices respectively, which would leave the annual inflation rates just slightly below last month’s highs of 7.3%Y/Y and 5.6%Y/Y respectively. The weekly jobless claims report is the only other US diary entry of note today.

Kiwi house sales down 11.7%Y/Y in July due to base effects, but prices continue to rise and now up more than 25%Y/Y; RBNZ survey points to sharp lift in inflation expectations
The REINZ housing report for July reported an 11.7%Y/Y decline in house sales in July – a drop that partly reflected the particularly high level of sales in July last year following the removal of national lockdown restrictions. The continued buoyancy of the housing market was illustrated by a further 2.4%M/M lift in the REINZ house price index to a new record high, with prices up more than 25%Y/Y. Looking ahead, the prospect of a further tightening of macro-prudential policy and an impending tightening of monetary policy should begin to remove some of the heat out of the housing market in coming months. If homebuilding continues near the current record pace, this should also alleviate pressure over the medium term. 

In other Kiwi news, the RBNZ released the results of its quarterly Survey of Expectations – a small sample survey mainly completed by economists and a selection of business people. The most closely watched indicator from the survey is the 2-year ahead expectation for inflation, which increased a further 0.22ppt to 2.27% – the highest reading since Q214 and helping consolidate opinion that the RBNZ will begin tightening monetary policy at next week’s meeting. 

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