Lagarde argues for gradual approach to normalisation

Chris Scicluna

Despite modest drop in December, UK GDP grows 1.0%Q/Q in Q421, broadly as expected, to be still 0.4% below the pre-pandemic level in Q419
Broadly in line with expectations, UK GDP rose 1.0%Q/Q in Q4, matching the downwardly revised estimate of growth in Q3, to be 0.4% below the pre-pandemic level in Q419. That remains an inferior performance to many of its G7 peers, with the US economy last quarter some 3.1% above its pre-pandemic level and French GDP 0.9% higher on the same benchmark. Most expenditure components grew over the quarter. But despite increased spending on transport and clothing as more employees returned to the workplace, private consumption growth moderated 1.7ppts from the prior quarter to 1.2%Q/Q, leaving it still some 0.4% below the pre-pandemic level, as spending on hospitality fell. In contrast, following no change in Q3, government consumption leapt a further 1.9%Q/Q to be almost 10% above the pre-pandemic level, as the coronavirus vaccination and test-and-trace programmes expanded once again, and patients were better able to visit their GPs.

Among other items, business investment rose by 0.9%Q/Q but was still a whopping 10.4% below its pre-coronavirus level. Overall growth in gross fixed investment was stronger at 2.2%Q/Q, boosted by housing and government capex. And net trade added a hefty 1.6ppts to GDP growth, as exports rose 4.9%Q/Q but imports fell 1.5%Q/Q to push the headline trade deficit down to 1.1% of GDP. The trade deficit, however, was flattered by trade in non-monetary gold, typically associated with shifts in the financial sector with no consequence for GDP, excluding which it was twice as large. And the level of export volumes was still some 18% below that in Q419 – a far inferior performance to the UK’s peers – with import volumes down some 9%. Inventories reportedly rose too. However, the need for adjustment and balancing items to make the data add up would otherwise suggest that they subtracted more than 2ppts from growth on the quarter.

While overall GDP growth was steady in Q4 from Q3, economic output fell back in December, albeit by a smaller-than-expected 0.2%M/M, as the latest wave of coronavirus, a shift to shopping patterns and perhaps also the erosion of real disposable income by high inflation weighed on consumer-facing services. That left the monthly level of GDP bang in line with its pre-pandemic level in February 2020. Output in consumer-facing services fell 3.0%M/M to be 8.4% below their pre-pandemic level, with retail trade down 3.7%M/M. But other services rose 0.1%M/M to be 2.8% above the pre-pandemic benchmark. Despite ongoing supply bottlenecks, production rose 0.3%M/M supported by output of pharmaceuticals (12.0%M/M) and transport equipment (3.1%M/M). But despite the incentive of higher prices, extraction of crude oil and gas fell 2.7%M/M. And overall production was still 2.6% below the February 2020 level. And construction leapt by 2.0%M/M, the most since March, to be 0.3% above the pre-pandemic level.

No surprises as drop in German inflation in January confirmed despite extra energy pressures
No surprises from the final German inflation data for January, which were confirmed at the flash estimates, which – of course – had been significantly higher than originally anticipated. So, the national measure of CPI dropped 0.4ppt while the EU-harmonised HICP measure fell 0.6ppt to 5.1%Y/Y. Of course, the declines principally reflected base effects associated with changes to VAT, the impact of which fell out of the arithmetic. Within the detail on the national measure, additional pressures inevitably came from energy prices (up 2.2ppts to 20.5%Y/Y). Food inflation slowed 1.0ppt to a still-high 5.0%Y/Y. So, excluding energy and food, core CPI dropped 0.8ppt to 2.9%Y/Y, with services prices also up 2.9%Y/Y but durable goods prices up a firm 4.9%Y/Y. Expect both core and headline inflation to rebound over coming months.

Lagarde follows Lane in arguing for gradual approach to normalisation; Italian Governor Visco likely to offer further dovish message today
Yesterday brought further relative dovishness from the ECB in an attempt to calm market expectations of significant tightening ahead. In particular, in a lengthy blog article, Chief Economist Lane underscored his dovish credentials by setting out the ‘logic’ of a ‘hold-steady approach to monetary policy’, noting among other things the still-subdued pace of wage growth in the euro area. And President Lagarde in an interview last night cautioned against adjusting policy ‘hastily’, again constrasted the economic situation in the euro area with those in the US and UK, and stated that ‘all of our moves will need to be gradual’. And a week that kicked off with commentary from some of the more hawkish members of the Governing Council members will end today with comments from another dove, Banca d’Italia President Visco.

US data-flow to end the week on a soft note with Michigan consumer confidence estimate set to drop to decade low
After yesterday’s upside surprise to CPI, the week’s US data-flow ends with just the University of Michigan’s preliminary consumer sentiment survey results for the current month. High inflation, equity market volatility and the spread of Omicron seems likely to weigh on sentiment. Daiwa America’s Mike Moran expects a further decline of 1.2pts to 66.0, below the BBG consensus and a level which would the lowest since late 2011. Meanwhile, Richmond Fed President Barkin is set to speak publicly.

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