UK GDP slows more abruptly than expected in July

Chris Scicluna

Wall Street slips again but Asia-Pacific markets rebound today on quiet day for local data
The tone on Wall Street remained modestly risk-off yesterday, with the S&P500 declining 0.5% to trace out its fourth consecutive modest decline. And while initial jobless claims posted a new pandemic low of just 310k, the Treasury market firmed for a second day, in this case taking its lead from the rally in European bonds following the ECB’s decision to conduct net PEPP purchases at only a “moderately lower pace” over the coming quarter. This saw the yield on the 10Y UST note decline a further 3bps to 1.30%, so erasing most of its remaining post-payrolls lift. A somewhat volatile session in commodity markets saw both crude oil and industrial metals close lower, while the greenback lost some ground, especially again the yen and sterling.

US equity futures have rebounded a couple of tenths since the close while US Treasuries have weakened slightly. So, with many Asia-Pacific bourses having already reported sizeable declines yesterday, the tone in the region has been slightly more positive today on what has been a very light day for local economic data. In Japan, after breaking its winning streak with a 0.7% loss yesterday, the TOPIX has rebounded 1.0% today. In political news, during his regular press conference, when asked to comment on the call by the outsider in the LDP leadership contest, Sanae Takaichi, to temporarily suspend the Government’s primary budget balance target, Finance Minister Aso said that he had no intention of allowing Japan to become a test bed for “modern monetary theory”. Meanwhile, the market continued to await an anticipated formal announcement by vaccine minister Taro Kono – expected at 4pm local time – that he too will be a candidate for the LDP leadership, providing a significant roadblock to the aspirations of Takaichi and the Fumio Kishida.

Turning elsewhere, China’s CSI300 has firmed 0.8%, while a rebound in tech shares has seen Hong Kong’s Hang Seng increase 1.7% after slumping 2.3% yesterday. There was little reaction to headlines following a US-initiated phone call between US President Biden and Chinese President Xi. According to the US account of the 90-minute call, the leaders discussed issues of common interest and expressed their disagreements respectfully. There have been no data in China today so far, but the PBoC’s money and credit aggregates could yet make an appearance today or over the weekend. In the Antipodes, despite declining 1.9% yesterday, Australia’s ASX200 has rebounded a relatively muted 0.5% today as daily new virus cases in New South Wales exceeded 1,500 for the first time and new cases in Victoria increased to a new high of 334. AGCB yields tracked the overnight move in USTs, while Kiwi bond yields also slipped as a key retail indicator pointed to a lockdown-driven 20%M/M decline in spending in August.

UK GDP slows more abruptly than expected in July as supply constraints bite
Earlier this week, BoE Governor Bailey acknowledged that the UK’s economic recovery appeared to be levelling off. And today’s GDP figures for July were fully consistent with that message, surprising significantly on the downside. Economic output rose just 0.1%M/M in July, compared to the consensus on the Bloomberg survey of 0.5%M/M and down from 1.0%M/M in June, to leave it still some 2.1% below the pre-pandemic level.

Despite further easing of pandemic restrictions, services activity failed to grow in July, to be similarly 2.1% below the pre-Covid level. There was significant variation in performance between sub-sectors, however. ICT and financial services both rose more than 2.0%M/M while arts and leisure jumped more than 9.0%M/M. But real estate and legal services weakened as property market activity slowed due to the tapering of the stamp duty holiday. Healthcare fell 1.1%M/M as doctor visits and vaccinations fell. And, overall, consumer-facing services dropped 0.3%M/M in their first decline since January to be still 6.7% below the pre-pandemic level, not least due to a fall of 2.5%M/M in retail trade.

In the other main sectors, manufacturing output was also flat in July to remain 2.4% below the pre-Covid level. A return to growth in autos production, as the semiconductor shortage appeared to ease somewhat, contrasted with a notable drop in output of machinery and equipment and most other factory sub-sectors. In addition, construction activity contracted for a fourth consecutive month, dropping 1.6%M/M to be 1.8% below the pre-pandemic level. So, UK GDP growth in July would actually have been negative had it not been for the reopening of an oil field after its closure for maintenance. With that oil production coming back on line, UK mining and quarrying output leapt more than 20%M/M to make the biggest contribution to growth.

The slowdown in UK GDP growth in July bears the clear hallmark of labour and other supply shortages that are restraining activity across a wide range of sub-sectors. Surveys such as yesterday’s REC report on jobs suggest that the labour and skill shortages became even more acute in August. And while the ending of the government’s furlough scheme at the end of this month might provide a near-term boost to labour supply, persistent skills mismatches and the drop in the number of foreign workers due to Brexit and Covid suggests that capacity constraints will bind for several months to come. As a result, while GDP growth in Q3 will undeniably again be positive, the pace of around 3%Q/Q pencilled in the BoE’s August forecast now looks too optimistic.

French IP grows further in July; final German inflation data confirm August flash estimates
The week’s euro area data-flow is coming to an end with a focus on industrial production in some of the large member states. Like in Germany, data released this morning showed that France recorded growth in production in July, albeit with overall IP slowing 0.3ppt to 0.3%M/M to leave it still some 4.8% below the pre-pandemic level in February 2020. Manufacturing output moderated 0.4ppt to 0.6%M/M to be down 5.5% from the pre-pandemic level. Within the detail, production of transport equipment rose for a second month, slowing just 0.1ppt to 2.9%M/M, but remained down more than 25% from the pre-pandemic level. Output of machinery and equipment slowed 0.5ppt to 0.7%M/M to be down 3.0% from February 2020. Beyond manufacturing, construction rose 1.4%M/M but was down 2.4% from the pre-pandemic level. Elsewhere, Spain this morning reported a second successive drop in IP of 1.1%M/M in July. And Italian data, due shortly, are expected to show output broadly unchanged. Overall, the data might suggest only a modest easing of supply bottlenecks at the start of Q3.

Separately, the final German consumer price data for August this morning confirmed the flash estimates, which showed that the EU-harmonised measure of inflation rose 0.3ppt to 3.4%Y/Y, the highest in thirteen years. The national CPI measure edged up 0.1ppt to 3.9%Y/Y. Of course, the rise in inflation partly reflects base effects and temporary factors associated with the pandemic, including shifts in energy and commodity prices and VAT changes – and the introduction of Germany’s carbon pricing scheme.

August PPI to conclude an exceptionally quiet week for US economic data
An exceptionally quiet week in the US concludes today with most interest centred on the release of the PPI report for August. Daiwa America’s Mike Moran expects the core PPI to have increased a further 0.6%M/M, which would be the smallest increase since March but still sufficient to lift the annual inflation rate above 6½%Y/Y. Given a recent decline in food prices, he expects a smaller 0.5%M/M lift in the headline index, which would nonetheless lift the annual inflation rate above 8%Y/Y. Of much less importance, a little later in the morning, the release of final wholesale trade data for July will close out this week’s diary.

Kiwi consumer spending slumps 20%M/M in August as the strict lockdown bites
In New Zealand, payments system data revealed a 19.8%M/M slump in spending at retail stores in August, reflecting the lockdown that begun during the second half of the month. Spending fell by about twice as much for hospitality, apparel and durable goods, but these declines were offset partly by a 9.3%M/M jump in spending on consumables such as groceries and liquor. With all but essential workers forced to work at home, spending on fuel fell more than 27%M/M.

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