UK GDP above pre-crisis level

Chris Scicluna
Emily Nicol

UK GDP beat expectations in November to leave output back above the pre-crisis level for first time
UK GDP beat expectations in November, rising 0.9%M/M following (upwardly revised) growth of 0.2%M/M in October. As a result, the average level of GDP in the first two months of Q4 was some 1.1% above the Q3 average, all but guaranteeing that quarterly GDP growth remained above-potential in the final quarter of the year despite the latest wave of Covid and more stringent restrictions. Moreover, the growth in November took the level of GDP above its pre-pandemic level in February 2020 for the first time and by a non-negligible 0.7%. The BoE is likely to be comforted by these figures. While next week’s labour market and inflation data will have an important bearing on next month’s monetary policy decision, and concerns remain about the impact of declining real disposable incomes on the outlook for consumption, today’s figures suggest that economic growth momentum will likely be judged sufficiently firm to allow for another rate hike this quarter.

Solid growth in services, manufacturing and construction alike
Within the detail of the report, growth in November was broad-based, with all major sectors providing support. Given its large size, the services sector made the largest contribution to growth in November (more than 0.5ppt), rising 0.7%M/M to be 1.3% above the pre-pandemic level, with just over half of services subsectors back above the February 2020 level too. A key source of growth in the sector that month was retail, output of which rose 1.4% as consumers appeared to bring forward Christmas shopping amid fears of supply disruption closer to the festive season. That also gave a boost to transport and storage services, while professional, scientific and technical activities were very strong. Covid-19 vaccinations and test-and-trace activity added 0.2ppt to GDP growth. But despite a better showing in November, consumer-facing services remained some 5.0% below the pre-pandemic level, while other services were up 2.9% on the same basis, illustrating the continued impact of Covid-19 on such activities.

While production rose 1.0%M/M in November after two months of negative growth, it was still some 2.6% below the pre-pandemic level (with manufacturing down 2.2% on that basis). Manufacturing output rose 1.1%M/M in November led by the autos subsector (up 7.8%M/M) as supply restraints appeared to ease somewhat, while other machinery and equipment rose 7.4%M/M. In contrast, mining and quarrying declined in November by 1.3%M/M due to declines in extraction of crude petroleum and natural gas. But with supply chain bottlenecks easing, construction output jumped 3.5%M/M, the most since March, to be 1.3% above the pre-pandemic level.

Chinese trade surplus hits new high in December as exports beat expectations again but imports slow
Ahead of Monday’s GDP data for Q4, the latest Chinese trade report saw exports beat expectations once again. In particular, export shipments rose 20.9%Y/Y in USD terms, down just 1.1ppts from November. In contrast, imports fell some way short of expectations, up 19.5%Y/Y on the same basis, down more than 12ppts from November. As such, compared to the consensus forecast of little change on the month, China’s trade surplus rose more than $22bn to a new high of $94.5bn to demonstrate once again that net trade continued to provide some offset to domestic demand weakness and support economic growth towards year-end. Indeed, the cumulative trade surplus in Q4 exceeded $250bn, up from $181bn in Q3. Within the detail, the data revealed broad-based strength in exports in December led by an acceleration in shipments to the US (up 21.2%Y/Y, almost 16ppts higher than in November). Among other items, shipments of steel were up 85%Y/Y while exports of aluminum were up rose 67%Y/Y. Exports of consumption goods were strong too, as was growth in Covid-related PPE. While imports of energy (especially crude oil and natural gas) were former, iron ore imports weakened significantly.

Japanese goods PPI fall for the first time since November 2020
After some weaker Chinese inflation numbers earlier this week, the overnight release of Japan’s goods PPI also fell short of expectations. Producer prices fell in December for the first month since November 2020, by 0.2%M/M, leaving the annual rate moderating 0.7ppt to 8.5%Y/Y, suggesting producer price inflation might have passed it peak. The decline principally reflected a drop in prices for petroleum and coal products (-4.3%M/M), to see annual inflation of such products easing 13ppts to an admittedly still high 36.6%Y/Y. The easing in price pressures also in part reflected imported goods, with prices declining for the first time in nineteen months (-0.4%M/M on a yen basis) having risen by a whopping 5½%M/M previously. But prices of domestic products also fell too. And the BoJ might also be discouraged to see producer prices of final consumer goods also slip back last month, albeit the annual rate was still up 4.0%Y/Y, the third-strongest reading since the 1980s. Of course, Japanese goods prices at the CPI level are inflating at nowhere near that rate (non-energy industrial goods inflation was still down 0.2%Y/Y in November). And while the emergence of the Omicron variant raises uncertainties about the near-term inflation outlook, today’s easing in prices at the producer level, might add to the resistance in passing on still high input costs to consumers.

Euro area goods trade data due, along with Germany’s full-year GDP growth in 2021
Today will bring euro area goods trade numbers for November. After falling to an eighteen-month low in October the trade surplus is expected to have narrowed further not least on the back of higher import prices. The release will also include export and import volumes numbers for October. This morning also brought updated French and Spanish inflation data for December – for which the headline HICP rate was unchanged at 3.4%Y/Y in the former but increased 1.1ppts from November to 6.6%Y/Y in the latter, a touch softer than suggested in the preliminary estimate – as well as Germany’s full-year GDP figures for 2021, which are expected to report disappointing growth of 2.7%Y/Y (consistent with little if any growth at all in Q4) following the drop of 5.0%Y/Y in 2020. Elsewhere, ECB President Lagarde is scheduled to speak publicly.

US retail sales and industrial production data focus today
US retail sales and IP reports will be of note today, with total sales expected to have risen in the run up to Christmas, albeit the increase will be limited by a dip in new auto sales and lower gasoline prices. Mike forecasts growth of 0.2%M/M in total sales but growth of 0.4%M/M ex autos. Meanwhile, manufacturing output is expected to have maintained an upwards trend at the end of the year, marking the third consecutive increase as supply constraints ease. The flash January University of Michigan consumer survey will also be of interest, with the spread of the Omicron variant and concerns about high inflation set to weigh on household sentiment and leave the headline index only marginally above the recession low of 71.8 in April 2020. 

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