UK retail sales fall more than expected in August raising risks of drop of GDP in Q3
UK retail sales fell further than expected in August, maintaining the clear downtrend in place since last spring and raising further the likelihood that the economy has slipped into recession. In particular, in real terms, retail sales volumes dropped 1.6%M/M to be down 5.4%Y/Y and 8.2% below the peak reached last April. The weakness in August left the average volume of retail sales in the first two months of Q3 some 0.8% below the Q2 average. So, given the period of mourning following the Queen’s death, and in particular the forthcoming extra national holiday on Monday, real sales look set to fall on a quarterly basis for a fifth successive quarter in Q3. Given the drop in consumer confidence last month to a series low and sharply falling real incomes, that should hardly come as a surprise. And it remains to be seen whether the government’s subsequent belated announcement of measures to cap household energy bills will suffice to arrest the downtrend next quarter.

As consumers felt the squeeze from high inflation, every major category of sales fell in August, with non-food store sales down 1.8%M/M, department stores down 2.7%M/M, clothing down 0.6%M/M and household goods down 1.1%M/M. Real sales at petrol stations dropped 1.8%M/M while sales at food stores, where price pressures have become particularly intense (the respective deflator rose 11.1%Y/Y in August), fell for a second successive month and by 0.8%M/M. In value terms, total sales also dropped in August, by 1.7%M/M. But, given sharp prices over the past year, the value of sales was up some 5.4%Y/Y, highlighting how shoppers have had to spend a lot more money to buy significantly less stuff.

China’s retail sales, IP and investment data for August beat expectations
Despite persisting headwinds related not least to Covid-19 outbreaks, power rationing amid a record heatwave, and ongoing property market adjustments, today’s Chinese activity numbers suggested hints of recovery in August. In particular, industrial production beat expectations in August, with growth up 0.4ppt to 4.2%Y/Y, the strongest for five months, thanks not least to a surprising surge in energy supply, up 13.6%Y/Y. Manufacturing output rose 3.1%Y/Y, driven by the fastest growth in the autos sector (30.5%Y/Y) since March 2021. Fixed-asset investment also came in firmer than expected (5.8%YTD/Y), propped up by a rebound in the public sector spending (10.1%YTD/Y), with manufacturing investment recording double-digit growth too. But investment in real estate continued to fall (-7.4%YTD/Y) as new home prices maintained their downwards trend, recording the twelfth consecutive year-on-year decline and by a steeper 2.1%Y/Y, the most in seven years.

Despite the rise in Covid infections, pent-up demand following wide-spread lockdowns seemingly supported a stronger than expected pickup in retail sales, with growth up 2.7ppts to 5.4%Y/Y in August, the firmest rate for six months. Admittedly, this was likely flattered to some extent by a low base a year ago, although the jobless rate was also estimated to have fallen 0.1ppt to 5.3%, the lowest since January.

Final euro area inflation data for August might well bring an upwards revision to the flash estimate, which itself was a record
In the euro area, today will bring updated HICP inflation figures for August. Equivalent figures from France and Spain were revised up from the flash releases. And so it will only take a modest upwards revision from Italy (due later this morning) to see the euro area headline inflation nudged higher from the flash estimate, by 0.1ppt to 9.2%Y/Y to leave it 0.3ppt above July’s reading and a new record high. With the national revisions reflecting stronger energy and food prices, we expect the euro area’s core HICP rate to align with the flash estimate of 4.3%Y/Y, up from 4.0%Y/Y in July. Separately, ECB President Lagarde and BoF Governor Villeroy de Galhau are scheduled to speak at an event in Paris.

US consumer survey to be watched signs of improvement in household sentiment and inflation expectations
In the US, focus today will be on the preliminary University of Michigan consumer survey for September. While households will have benefitted from a decline in gasoline prices at the start of the month, this will have been offset to some extent by rising prices of other essentials and increased borrowing costs. Moreover, any modest improvement in consumer sentiment will still leave it close the bottom of the historical range. Ahead of next week’s FOMC meeting, the survey’s measures of inflation expectations will also be closely watched – the Bloomberg consensus forecasts a further modest drop in the measure for expected inflation in the next twelve months, by 0.2ppt to 4.6%Y/Y.