UK GDP fell short of expectations in February

Emily Nicol

UK GDP falls short of expectations in February but maintains broadly steady growth trend (for now)
UK GDP grew a smaller-than-expected 0.1%M/M in February. But having followed strong growth in January (0.8%M/M) and upwards revisions to growth in September through to November last year, that took GDP 1.5% above the pre-Covid level in February 2020. Looking through the month-to-month volatility caused by the ebb and flow of the pandemic, it suggested that the UK’s growth trend remained solid, with the 3M/3M growth rate of 1.0% still above the BoE staff’s most recent estimate (0.75%), but nevertheless down from that of the previous two months (1.3%). 

Within the detail, services activity rose a further 0.2%M/M, led by tourism-related activity as households looked to get back to normal in light of the diminished threat from omicron. In contrast, the health sector was a drag on service sector growth as vaccination and test and trace activity fell back. That took the level of total services activity 2.1% above the pre-Covid level, although consumer-facing services were still down 5.2% against the same benchmark illustrating scope for further catch-up over coming months. 

The main weakness in February was driven by production output, which fell 0.6%M/M in February largely offsetting the growth in January as supply bottlenecks continued to limit production capacities. Indeed, there were sizeable contractions in output of autos (-9.4%M/M) computer, electronic and optical productions (-4.3%M/M) and chemicals (-5.0%M/M). Construction output also slipped back very slightly in February (-0.1%M/M) but this followed upwardly revised growth in January (by 0.5ppt to 1.6%M/M) to leave it 1.1% above the pre-Covid level. 

UK inflation to jump to a new-30-year high
The UK’s data flow will continue tomorrow with the latest labour market report expected to suggest that conditions remained very tight, with the unemployment rate expected to have edged down further in the three months to February to 3.8%, as vacancies continued to grow. Growth in average regular wages is likely to remain close to the 3.8%3M/Y recorded in January, to leave real regular wage growth slipping further into negative territory. Indeed, Wednesday’s release of CPI inflation numbers for March is likely to see the headline CPI rate rise 0.6ppt to 6.8%Y/Y, a fresh 30-year high. While energy prices will continue to exert significant upwards pressure, we also expect prices of non-energy industrial goods and services to rise further, boosting core inflation by 0.3ppt to 5.5%Y/Y, similarly a 30-year high. Other March releases due this week include the BRC retail sales monitor (tomorrow), RICS residential market and BoE consumer credit surveys (Thursday).

Chinese inflation remains subdued giving scope for further PBoC policy support this week
With Chinese CPI inflation still very subdued despite rising in March and PPI inflation having eased further, expectations are for the PBoC to provide further support to flagging domestic demand this week. Admittedly, consumer price inflation increased 0.6ppt to a three-month high of 1.5%Y/Y. That was largely due to a 2.4pt increase in the food component to -1.5%Y/Y, as fresh vegetable inflation jumped more than 17ppts to 17.2%Y/Y. Non-food CPI inflation rose just 0.1ppt to 2.2%Y/Y. And with services inflation having fallen 0.1ppt to a nine-month low (1.1%Y/Y), core CPI (excluding food and fuel) was unchanged at just 1.1%Y/Y. Meanwhile, producer price inflation slowed 0.5ppt to an eleven-month low of 8.3%Y/Y, some 5.2ppts below October’s peak.

BoJ regional report unsurprisingly sees economic assessments revised lower
The BoJ’s regional economic report published this morning inevitably saw the economic assessment revised lower from three months ago for eight out of nine of its regions (perhaps the only surprising thing was that all nine were not downwardly revised), with the resurgence of the pandemic having weighed particularly on consumer-facing services and supply-side constraints becoming more binding in certain manufacturing sectors.And so today BoJ Governor Kuroda stated in his address to regional branch managers that there remained significant uncertainties for the near-term outlook. And while he reiterated his view that inflation will likely rise sharply due to soaring energy prices and the fading impact of last year’s cut in mobile phone tariffs, he also stated that the BoJ would not hesitate to add easing if required.

Looking ahead, the monthly Reuters Tankan survey (Wednesday) will provide an update on conditions this month, with the persisting Ukraine war, Covid lockdowns across China and higher cost burdens likely to have weighed more heavily on manufacturing confidence. But having dipped to a five-month low in March, the headline non-manufacturing index might well be given a boost by the government’s decision later last month to lift domestic pandemic-restrictions. That same day will bring the latest machine orders data for February, while tomorrow will bring the latest goods PPI figures for March.

ECB to leave policy and guidance unchanged at Thursday’s Governing Council meeting
The main event of the week in the euro area will be the ECB’s policy announcements on Thursday. The economic outlook has clearly deteriorated since its last meeting in March, with CPI inflation having risen to a new record high of 7.5%Y/Y, while the anticipated near-term profile would put inflation closer in line with the ECB’s adverse scenario (5.9%Y/Y) rather than the baseline (5.1%Y/Y) for this year as a whole. Of course, the further eroding of real disposable incomes has already brought a substantial worsening in consumers’ expectations of their personal finances. And firms seem bound to be further impacted by supply shortages and higher cost burdens, which will continue to limit the post-pandemic recovery. We have also seen a meaningful tightening in financial conditions since the 9-10 March meeting, with the average euro area 10Y yield currently some 60ps higher than before the start the meeting and almost 96bps above the level at the start of the year, with the equivalent 2Y yield up 53bps and 64bps respectively.

Recent comments from Governing Council members about their assessments of how the risks to the outlook are unfolding suggest that no-one has substantially changed their position since the last meeting. The hawks (e.g. Schnabel and Knot) continue to express increasing concerns about the upside risks to inflation, while the doves (e.g. Lane and Panetta) continue to flag the downside risks to the medium term outlook not least from weaker growth, highlighting that there is so far no sign of second-round effects on inflation. And while last week’s minutes appear to confirm that the hawks have the upper hand, importantly, the guidance makes clear that the ECB’s purchase profile in Q3 will be data dependent. And so, the decision on policy for the coming quarter will be taken in June on the basis of updated economic projections. Of course, if recovery momentum is maintained this would still allow the ECB’s bond buying to be brought to end in Q3 and the first rate hike to come before the end of the year.

German and French surveys to illustrate deterioration in sentiment
This week’s euro area data calendar is relatively sparse kicking off tomorrow with the latest German ZEW investor survey, which seems bound to echo the downbeat message from last week’s sentix release. The Bank of France’s business sentiment survey (due the same day) will provide an update on conditions at the end of the first quarter, with the BoF to provide an updated forecast for GDP growth in Q1. Final March inflation figures from Germany (tomorrow), Spain (Wednesday), France and Italy (Friday) are also due.

US inflation set to rise to a new near-40-year high
The most notable US release this week will be CPI inflation numbers for March due tomorrow. Energy prices accelerated last month and food prices remained under upwards pressure. So Daiwa America’s Mike Moran expects consumer prices to have risen 1.0%M/M, a touch below the Bloomberg consensus, but still the highest monthly increase since 2008. If Mike’s right, the annual inflation rate will jump to 8.3%Y/Y, the highest for more than four decades. And against the backdrop of strong demand, rising residential rents and supply-side disruptions, this release is likely to confirm a further widening of price pressures – indeed, core prices are forecast to have risen 0.5%M/M, to be a little more than 6½% higher than a year earlier. PPI data (Wednesday) will continue to illustrate significant price pressures at the factory gate. Retail sales and industrial production figures for March (due Thursday and Friday respectively) will also be of note. While vehicle sales fell back in March and demand for other goods more modest in light of increased spending on services, retail sales will have been boosted by higher prices. Thursday will also bring the flash University of Michigan’s consumer sentiment survey. 

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