UK Q2 GDP revised up significantly

Chris Scicluna
Emily Nicol

US equities and bonds steady yesterday but dollar rally continues; US equity futures firmer today as a government shutdown appears likely to be averted, but Asian markets mixed
While the S&P500 had rebounded as much as 0.7% intraday, with an unexpectedly large lift in pending home sales in August adding to favourable news on retail spending during the month, investors had to be content with a modest 0.2% advance at the close as concerns about the fiscal impasse on Capitol Hill continued to weigh on sentiment. With Jay Powell – speaking on a panel alongside his counterparts from the ECB, BoJ and BoE – reassuring investors that the impact of supply constraints on inflation will surely pass, the sell-off in the US bond market took a breather, with the 10Y note closing down 2bps at 1.52%. Even so, the greenback retained its positive trend, with ¥/$ briefly exceeding 112 and $/€ briefly falling below 1.16.

US equity futures have adopted a more positive tone in Asia – S&P minis are currently up 0.8% – with Senate Majority Leader Schumer telling reporters that the Senate will vote this morning on a continuing resolution to keep the government open until 3 December, thus averting a shutdown from tomorrow. Of course, this leaves the much thornier issue of the debt ceiling still to be addressed – a standalone bill approved by the House yesterday will certainly fail to pass in the Senate – with Republicans still hoping to leverage this in a bid to force Biden to substantially pare his budget spending plans. Despite the rise in equity futures, Treasury yields have traded slightly lower in Asia.

Against that background, it has nonetheless been a mixed session for Asian equity markets. In Japan, the TOPIX has declined 0.4% with sentiment likely weighed down by local August data readings, with a 3.2%M/M fall in IP (in large part due to a slump in auto production), a 4.1%M/M drop in retail sales and a 7.7%M/M plunge in housing starts exceeding the modest declines that analysts had expected. By contrast, with markets in China beginning a week-long holiday tomorrow, the CSI300 has firmed 0.7%, with investors perhaps taking heart from a solid rebound in the official non-manufacturing PMI in September. While the official manufacturing PMI unexpectedly fell below 50 for the first time since February – with electricity shortages said to have weighed on output in energy-intensive industries – the Caixin manufacturing PMI made it back to an even 50. Equity markets in South Korea and Singapore have also firmed. However, in Hong Kong, which is on holiday tomorrow only, the Hang Seng has declined amidst weakness in IT and consumer stocks.

Turning to the Antipodes, Australia’s ASX200 has rallied more than 1½% today. Materials stocks have been supported by a further rebound in the price of iron ore, while news of an unexpected lift in dwelling approvals in August – the first since March – provided a boost to financials, especially with August credit growth also proving slightly firmer than expected and job vacancies remaining near a record high. Aussie bond yields have nudged lower, however, tracking the decline in UST yields.

Japan’s IP falls a disappointing 3.2%M/M in August as the virus and supply chain issues weigh; now on track to contract 2%Q/Q in Q3, before rebounding in Q4
The usual end-of-month dump of Japanese economic data began today with most interest centred on the industrial production report for August. Analysts had anticipated a small decline in output in light of ongoing supply chain bottlenecks and the spike in virus cases during the month. However, METI’s preliminary estimate of a 3.2%M/M slump in production was much worse than the consensus estimate, albeit perhaps not greatly surprising in light of the last week’s reported decline in the manufacturing PMI output index to a contractionary reading of 48.0. Given base effects associated with last year’s first wave nosedive in activity, annual growth remained flattering at 9.3%Y/Y. However, more meaningfully, despite growth in exports over the period, output in August was 3.7% lower than the pre-pandemic level that prevailed in February 2020.

Turning first the production detail, much of the decline in production in August was due to a 14.4%M/M slump in output of durable consumer goods, which left this series down 11.4%Y/Y. Consistent with reports of constraints imposed by both parts shortages and the surge in virus cases, production of autos slumped 17.3%M/M. Indeed, the production cutback in the auto sector accounted for about 40% of the overall decline in IP during the month. By contrast, production of non-durable consumer goods, less impacted by pandemic-related restrictions, fell just 0.5%M/M in August and was up 1.0%Y/Y. Sadly, production of capital goods declined 6.5%M/M in August. And while production was up 22%Y/Y, this reflected base effects associated with the pandemic and the pull-forward of investment spending ahead of the October 2019 consumption tax hike. Excluding transportation equipment, production of capital goods declined a slightly smaller 4.7%M/M, driven by an 8.4%M/M decline in output of electrical machinery and a 13.8%M/M decline in output of ICT equipment. Bucking the trend, production of construction goods increased 0.8%M/M in August, lifting its annual growth to 6.9%Y/Y.

Elsewhere in the survey, METI reported that shipments fell 3.8%M/M in August. And while shipments were up 7.7%Y/Y, they were 5.9% lower than in February 2020. Inventories declined just 0.3%M/M and were down 3.9%Y/Y. The monthly decline in inventories owed mostly to a near 17%M/M decline in transport equipment, with inventories of autos down more than 23%M/M amidst the sharp pullback in production. The full year decline owed mostly to a near 25%Y/Y decline in inventories of autos and a near 34%Y/Y decline in inventories of ICT equipment. Inventories of electronic parts and devices increased more than 17%M/M in August – the second large increase reported in the past three months – reducing their annual decline to a 14-month low of 2.5%Y/Y.

Looking ahead, according to METI’s survey, firms forecast a mere 0.2%M/M rebound in output in September, which is less than the 1.0%M/M growth that firms had forecast last month. And given that firms are usually too optimistic the in formulating their forecast, METI estimates a much weaker bias-corrected 1.3%M/M decline in output for the month (with a ±1.9ppt range at the 90% confidence level). Assuming no major revisions to today’s estimates for August, METI’s forecast for September would leave output down about 2%Q/Q in Q3, thus marking the first quarterly contraction since Q220. More encouragingly, at this stage firms forecast a substantial 6.8%M/M increase in output in October, which we would expect to be supported by still-positive assessment of business conditions in tomorrow’s BoJ Tankan survey. However, reflecting the present situation, METI lowered its overall assessment of the sector to say “production is at a standstill”, compared with its previous assessment that “production is picking up”.

Japan’s retail sales slump 4.1%M/M in August; housing starts fall an even larger 7.7%M/M
Turning to the rest of today’s Japanese data, with daily new virus cases having peaked at over 25,000 during the middle of the month, and with much of the country subject to restrictions, retail sales took a large step backwards in August. After previously reaching the highest since September 2019 – the month before the consumption tax increase – total retail spending slumped 4.1%M/M – more than twice as much as the consensus estimate – leaving spending down 3.2%Y/Y. Other than broadly unchanged spending on motor vehicles, weakness was widespread across the various categories, but with the largest declines registered for apparel and accessories (-7.1%M/M), general merchandise (-6.4%M/M) and fuel (-6.1%M/M). As always, a more complete indication of overall consumer spending as captured in the national accounts should be provided by next week’s release of the BoJ’s Consumption Activity Index and later by the even more accurate Cabinet Office’s Synthetic Consumption Index. However, at this stage, today’s data would appear to increase the likelihood of a pullback in private consumption spending being reported in Q3 following an unexpected lift in Q2.

Completing today’s disappointing Japanese data, after previously attaining the highest level since June 2019, housing starts declined 7.7%M/M in August. Housing starts were still up 7.5%Y/Y – albeit 2ppt below the consensus estimate – but were almost 6% lower than in August 2019.

China’s official non-manufacturing PMI rebounds; official and Caixin PMIs provide contrasting views on developments in the manufacturing sector
The focus in China today was on the first PMI reports for September, especially in light of the weakening reported last month, particularly in the non-manufacturing sector where a local virus outbreak had a significant negative impact on business conditions.

Turning first to the unambiguously positive news, with the local virus outbreak brought under control, the official non-manufacturing PMI rebounded 5.7pt to 53.2, thus almost completely erasing the decline recorded in August. The new orders index increased an even larger 6.8pt to 49.0 – below 50 for a fourth consecutive month – while the business activity expectations index increased 1.7pt to 59.1 (still slightly below the average reading over the past decade). The rebound in activity translated to the surveys pricing indicators, with the input prices index rising 2.2pt to 53.5 and the output prices index rising 1.2pt to 50.5.

Developments in the manufacturing sector were less clear in September, with the official and Caixin PMIs providing contrasting accounts. Probably most importantly, in contrast to the modest improvement that the consensus had expected, the official manufacturing PMI fell a further 0.5pt to 49.6 in September. This marks the first sub-50 reading since February last year (admittedly far above the 35.7 recorded that month). While the PMI for large firms edged up 0.1pt to 50.4, the PMIs for medium- and small-sized firms declined 0.7pt and 1.5pt to 49.7 and 47.5 respectively. In its press statement accompanying the release, the NBS noted that the PMIs 12 of 21 industries remained in expansionary territory, with weakness concentrated in energy-intensive industries – such as fuel processing, chemicals, plastics, metals smelting and processing – which have been impacted by high commodity prices and electricity shortages.

In the detail, the output index fell 1.4pt to 49.5, while the new orders index fell 0.3pts to 49.3 and the new export orders index fell 0.5pt to 46.2. Supplier delivery times shortened only fractionally and so remain longer than usual, pointing to continued supply chain bottlenecks affecting production. Despite the weakening seen in the activity indicators, the survey also pointed to slightly firmer inflation pressure, with the input prices index increasing 2.2pt to 63.5 and the output prices index rising 3.0pt to 56.4 – both nonetheless remaining considerably below the highs seen during the first half of this year.

In contrast to the official survey, the Caixin manufacturing PMI – which is focused more on small- and medium-sized firms operating in the export sector, lifted 0.8pt to 50.0 in September. This outcome was actually slightly above the consensus estimate, although the index failed to erase the decline reported in August. In the detail, this survey reported a 1.2pt lift in the output index to 49.0, while the new orders index increased 2.8pt to a three-month high of 50.8. However, the new export orders index fell 0.3pt to a seven-month low of 47.7.

UK Q2 GDP revised up significantly and Lloyds survey signals stronger business optimism and elevated wage expectations; but house prices slow and car output plummets
Today’s UK GDP figures provided a significant upwards surprise, with activity last quarter now estimated to have accelerated 5.5%Q/Q, 0.7ppt stronger than previously measured. Within the detail in Q2, growth was revised higher for production, construction and services last quarter, while on the expenditure side the upwards revision reflected firmer investment, government spending and net trade, while inventories were now considered to have provided a significant drag. Taken together with previous revisions – including a slightly softer contraction in Q121 and Q220 and a stronger rebound in Q320 – GDP was up a stronger 23.6%Y/Y. Moreover, the level of output in Q221 is now estimated to be ‘just’ 3.3% below the pre-pandemic peak, compared with a shortfall of 4.4% judged previously. And the revised monthly profile suggests that GDP in July was just 1.3% below the pre-pandemic peak (compared with 2.5% before today’s revision). So, at the margin, today’s release will certainly strengthen the case of the hawks on the MPC.

The hawks on the MPC will also note the findings of the Lloyds Business Barometer published overnight, which suggested that business confidence continued to improve in the first half of this month, with the headline survey measure (46%) reaching its highest since April 2017. The increase on the month (+14%) was the biggest since April 2021, and was attributed to greater confidence about the wider economy, which reached the highest since 2015. Perhaps most notably, firms’ employment expectations jumped to the highest in more than four years, with more than half of surveyed businesses expecting to increase their workforce in the coming year. And more firms signalled stronger wage growth, with the survey index up to the highest on the series, which admittedly dates only back to 2018. One caveat is that the survey was conducted before the current bout of disruption to petrol supplies, which seems highly likely to have hurt sentiment (although might also add to expectations of stronger wage growth).

UK car production figures published by the SMMT overnight continued to flag the hit from supply bottlenecks, and the semiconductor shortage in particular. Car factories produced just 37,246 units in August, a drop of 27% compared with August 2020, which itself was a relatively low base. Indeed, output was down a whopping 60% compared with August 2019 and was the lowest for the month since the survey begun in the 1970s. So, while the number of cars produced in the first eight months of 2021 was up 13.8%YTD/Y, they were still down by almost one third compared with the equivalent period in 2019 and by almost 43% compared with the average corresponding period in the five years before the pandemic (equivalent to 440k cars). And with supply bottlenecks expected to continue through to at least early 2022, SMMT remained extremely downbeat about the near-term outlook for the industry.

Finally, in terms of UK data, today’s Nationwide house price index reported that prices rose just 0.1%M/M in September, following growth of 2%M/M in August. This left prices up 10.0%Y/Y, a slight softening from August (11.0%Y/Y). But consistent with the recent moderation in mortgage approvals and with affordability having become stretched as house prices outpaced earnings, we expect to see a further easing in house price growth over the near term as the government’s stamp duty holiday and job support schemes come to end today.

Flash inflation in France up again but a touch less than expected; German and Italian inflation set to rise too due not least to energy prices; euro area unemployment figures also due
After yesterday’s upside surprise to Spanish inflation, the equivalent numbers from France just released surprised slightly on the downside. Nevertheless, they inevitably reported an increase in inflation this month, with the national CPI measure up 0.2ppt to 2.1%Y/Y and the EU-harmonised measure up 0.3ppt to 2.7%Y/Y, the highest in almost a decade. The increase was of course driven by inflation of energy (up 1.7ppt to 14.4%Y/Y on the national measure), as well as services (up 0.8ppt to 1.5%Y/Y), while inflation of food (down 0.3ppt to 1.0%Y/Y) and manufactured goods (down 0.7ppt to 0.4%Y/Y) as the impact of the timing of summer discounting fell out of the calculation. The German and Italian figures are also due today and are also set to report increases in inflation of around ½ppt. On the EU harmonized measure, German inflation is likely to jump to at least 4.0%Y/Y, something that might bring the Bundesbank out into a cold sweat. Italian inflation on the same measure is likely to rise to 3.0%Y/Y.

Separately, euro area unemployment figures are expected to report a further decline in August to 7.5%, which would be the lowest rate since May 2020 (from 7.6% in July) and in line with the level at the end of 2019 – admittedly flattered by continued government support schemes. German labour market figures for September are also due along with French consumer spending and Spanish retail sales for August.

In the US, attention remains on Capitol Hill; Q2 GDP revisions and Chicago PMI also due, alongside more Fedspeak
Today’s US economic diary is again relatively light with most interest likely to be centred on the Chicago PMI for September and a further update to the estimate of GDP growth for Q2. Regarding the latter, Daiwa America’s Mike Moran expects growth to be revised up a modest 0.2ppt to 6.8%AR, led by favourable revisions to construction and inventory accumulation. Jay Powell will reprise his CARES Act testimony alongside Janet Yellen, this time before the House Financial Services Committee, and there are a number of other Fed speaking engagements too. However, most attention today will remain focused on Capitol Hill. While it appears that Congress will pass a continuing resolution today to keep the government open until 3 December, this simply turns attention to the even more pressing need to raise or suspend the debt ceiling by about the middle of next month in order for the US to avert a default.

Australian dwelling approvals rise in August despite lockdowns; credit growth slows slightly while the ABS measure of job vacancies remains close to record levels in Q3
Turning to today’s Aussie data, the number of dwelling consents increased 6.8%M/M in August, unexpectedly ending a run of five consecutive declines since a steep increase during Q1. As a result, approvals were up 31.2%Y/Y, and stand more than 15% above their pre-pandemic level despite almost half of the country being subject to lockdown restrictions. Of the major states, while approvals fell 2.3%M/M in New South Wales, double-digit growth was reported in Victoria, South Australia and Western Australia, while approvals in Queensland increased 4.0%M/M. Approvals for private houses increased 3.5%M/M and 23.8%Y/Y, whereas approvals for multi-unit dwellings grew 13.7%M/M and 47.4%Y/Y. In value terms, approvals for non-residential buildings – which are very volatile – jumped more than 43%M/M in August and so grew 16.5%Y/Y. As a result, the value of approvals for all classes of buildings increased over 20%M/M and 29%Y/Y – figures that bode well for the economy once lockdowns begin to ease.

Meanwhile, private sector credit grew 0.6%M/M in August – slightly above market expectations – lifting annual growth to a more than three-year high of 4.7%Y/Y. Housing-related credit grew 0.6%M/M, lifting annual growth to 6.2%Y/Y. That growth owed mostly to a further 0.8%M/M increase in loans to owner-occupiers (now up 8.4%Y/Y – the most since October 2016). Ny contrast, lending to investors increased at a relatively sedate pace of 0.2%M/M and 2.2%Y/Y. Australia’s regulators are monitoring housing-related lending closely, with APRA now mulling potential macro-prudential interventions should they be deemed necessary. Likely reflecting the ongoing impact of lockdowns, other personal loans declined 0.6%M/M – the third consecutive decline – and so were down 5.6%Y/Y. Meanwhile, business credit increased 0.6%M/M in August, lifting annual growth to 3.4%Y/Y from 2.4%Y/Y previously.

In other news, after reaching a record high last quarter, the ABS measure of job vacancies fell 9.8%Q/Q in Q3, clearly impacted by the recent lockdowns across some of Australia’s most populous cities. Even so, the number of vacancies remained up almost 62%Y/Y and was almost 47% higher than prior to the pandemic, suggesting that the labour market will continue to tighten just as soon as lockdown restrictions ease.

Kiwi business sentiment remains resilient in September despite recent lockdown; dwelling approvals rise to new record high in August
The domestic focus in New Zealand today was on the release of the finalised ANZ Business Outlook survey for September. Of greatest importance, the Activity Outlook index – which tracks GDP growth – declined an unrevised 1ppt to 18.2, which is not far below the long-term average for series. Firms’ investment and employment intentions were also confirmed to have softened slightly, but the series remain above their long-term averages. Finally, courtesy of a small upward revision, firms’ year-ahead inflation expectation stood at 3.02%, thus remaining above the top of the RBNZ’s 1-3% inflation target range for a second consecutive month – an outcome last seen a decade ago.

In other news, although the country was in lockdown during the second half of the month, the number of new dwelling approvals increased by a further 3.8%M/M in August, thus marking yet another new record high for the series. Approvals also up more than 42%Y/Y, with growth led by new townhouse, flats and units as developers respond to the tremendous growth in existing house prices over the past year – a response that should ultimately help to stabilise prices, especially as monetary and macro-prudential conditional tighten. The value of non-residential building approvals also increased almost 17%Y/Y, and so that the total value of all construction approvals grew almost 29%Y/Y. So while construction activity has recently been constrained by the lockdown, the near-term outlook activity for this sector appears very robust.

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