UK GDP confounds gloomy expectations

Chris Scicluna
Emily Nicol

Japanese Reuters Tankan signals subdued business conditions at start of Q3
The monthly Reuters Tankan survey today suggested little improvement in Japanese business conditions at the start of Q3, with manufacturers continuing to flag issues with supply bottlenecks associated not least with China’s latest lockdowns, as well as higher cost burdens that have been exacerbated by the weaker yen. The headline manufacturing DI was unchanged in July at 9, suggesting a modest expansion trend, although there were declines in the equivalent DIs in the basic materials, chemicals, food and autos subsectors. And while manufacturers forecast a modest improvement over the coming three months, the DI was still forecast (13) to remain below the average level seen during 2021.

Following an initial improvement in conditions in the non-manufacturing sector as pandemic restrictions were lifted in May, today’s survey suggested that sentiment in the sector had moved broadly sideways too, with the headline DI up just 1pt to 14, admittedly a 29-month high but nevertheless still roughly one third lower than the average level in the year before the pandemic. Retailers’ mood remained flat and the net share of construction firms continued to report declining confidence. And like manufacturers, services firms are expecting conditions to remain little improved over the coming three months too.

UK GDP confounds gloomy expectations with rebound in May
Contrary to expectations of negligible growth, UK GDP rebounded 0.5%M/M in May. That followed a revised drop of 0.2%M/M in April, which was 0.1ppt less than previously thought. As a result, economic output rose more than 1% above the pre-pandemic peak. And the average level in the first two months of Q2 was 0.1% above the average in Q1. So, the data reinforce expectations that the BoE will hike Bank Rate by 50bps to 1.75% in August. But with a contraction highly likely in June not least due to the impact of the extra bank holiday and public transport strikes that month, as well as a non-negligible probability of downwards revisions to the existing data, for now we maintain our forecast of a contraction in GDP over Q2 as a whole, although this now would seem likely to have been very modest indeed.

The detail of today’s data suggested that UK GDP growth in May was also relatively broad-based. However, as has frequently been the case throughout the pandemic, there were some unusual sources of expansion. Indeed, while growth in services output was stronger-than-expected at 0.4%M/M, that was principally thanks to a large rise (15%M/M) in the number of doctor appointments, which more than offset the impact of a further drop in Covid-related healthcare activity. Less happily, despite much stronger tourism activity (up 11.0%M/M) and due to a drop in retail trade (-0.5%M/M), output in consumer-facing services fell 0.1%M/M to be still some 4.7% below the pre-pandemic level. Output in manufacturing and construction significantly beat expectations, rising 1.4%M/M and 1.5%M/M respectively.

BoF survey suggests steady activity in June, modest GDP growth in Q2, and a little less pressure on prices
Based on its latest business survey conducted at the turn of the month, the Bank of France judged French economic activity in June to have been broadly stable after modest growth in April and May. As a result, in line with our own forecast, it estimates GDP growth of about ¼%Q/Q in Q2 following the contraction of 0.2%Q/Q in Q1. By sector, industrial production was estimated to have been little changed in June, with growth in pharmaceuticals but contraction in the machinery and chemicals. The survey also reported modest expansion in services, thanks to growth in business services, and construction.

While the Bank of France reported that supply constraints had eased slightly, they also appear to have remained substantive, with 59% (-2ppts on the month) of firms in industry and 52% (-3ppts) of firms in construction reporting that they were a barrier to activity. Moreover, labour shortages appear to have become more problematic, with recruitment difficulties cited by 58% (+3ppts) of firms, particularly those in services. Notably perhaps, however, the share of firms suggesting that they were increasing their selling prices (36%) fell for the second successive month, reportedly in part due to lower commodity prices.

Final June inflation confirm flash estimates, with German inflation lowered by temporary measures but French inflation boosted by higher energy and food prices
This morning also brought revised June inflation numbers from the largest two member states. There were no revisions to the German figures, which saw the HICP rate drop ½ppt to 8.2%, while the national CPI measure saw headline inflation fall 0.3ppt to 7.6%Y/Y. The decline principally reflected temporary policy measures, with the introduction of the €9 monthly travel ticket and fuel discounts causing inflation in the transport sector drop 8ppts to 8.3%Y/Y. While Destatis noted that the impact of the fuel discount was difficult to quantify, without the support measures – i.e. prices for fuel and public transport had remained unchanged in June – it estimated that headline CPI inflation would have increased 0.7ppt to 8.6%Y/Y.

Despite the fuel discounts, Germany’s energy inflation eased only slightly, by 0.3ppt to 38.0%Y/Y, and food inflation jumped 1.6ppt to 12.7%Y/Y. While the non-energy industrial goods component rose in June (up 0.4ppt to 5.6%Y/Y), services inflation fell 0.8ppt to 2.1%Y/Y, a twelve-month low. As such, core inflation also edged lower, by 0.6ppt to 3.2%Y/Y, a four-month low. Of course, these downwards pressures will prove temporary, with inflation likely to rebound in the autumn when the relief measures elapse.

The French figures were similarly unrevised from the flash, confirming that HICP inflation increased 0.7ppt to 6.5%Y/Y, with national CPI inflation up 0.6ppt to 5.2%Y/Y. This reflected a further acceleration in energy inflation (up 5.3ppts to 33.1%Y/Y), with food inflation up 1.5ppts to 5.8%Y/Y. But while the services component edged slightly higher (0.1ppt to 3.3%Y/Y), the manufactured goods rate eased (by 0.5ppt to 2.5%Y/Y) due to a marked drop in clothing inflation on the back of summer discounting. So, while core inflation moved sideways (3.2%Y/Y), this will likely resume an upwards trend this month.

Euro area IP data due later this morning and likely to be subdued
Looking ahead, this morning will also bring the euro area industrial production numbers for May. Despite the surge in Ireland that month (13.9%M/M), production was subdued in Germany, France and Spain and fell by more than 1%M/M in Italy. So, based on national figures published so far, euro area IP likely rose just 0.2%M/M in May, although April’s outturn (0.4%M/M) should be revised higher.

US consumer prices set to have risen further in June, with energy, food and core components likely to be higher
Today brings the US data highlight of the week with the June CPI inflation report. With energy prices having jumped again in June and food prices maintaining a steady upwards trend too, our colleagues at Daiwa America expect consumer prices to have risen a firm 0.9%M/M in June, admittedly a touch below the Bloomberg survey consensus (1.1%M/M). This would likely leave the annual rate of headline inflation unchanged at 8.6%Y/Y. But continued pressure from rents, travel-related expenses, and costs of medical care services suggests another rapid increase in the core component too – Daiwa America forecasts a slightly below-consensus increase of 0.5%M/M, to leave core inflation down 0.3ppt to 5.7%Y/Y.

In addition, the Fed’s latest Beige Book will provide an update on current economic conditions, while the monthly Federal budget statement is also due. 

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