German GDP up slightly in Q2

Chris Scicluna
Emily Nicol

German GDP up slightly in Q2 due to increased spending on services
According to revised data published this morning, German GDP in Q2 rose 0.1%Q/Q, a touch better than the initial estimate of no change from Q1, to be up 1.7%Y/Y and only marginally below the pre-pandemic level in Q419. The small amount of growth came from consumption. Thanks not least to greater opportunities to travel and eat out after pandemic restrictions were eased at the end of March, household spending rose 0.8%Q/Q. While high inflation led to weaker spending on durable goods and food, a drop in the savings ratio back to the pre-crisis level supported the increased spending on services. And government consumption also made a positive contribution to economic growth, rising 2.3%Q/Q in part thanks to higher spending on healthcare. But due not least to a sharp pullback in construction (-3.4%Q/Q) after a strong showing during the mild winter, fixed investment dropped a larger-than-expected 1.3%Q/Q. Moreover, net trade subtracted from GDP growth as exports (up just 0.3%Q/Q) were outpaced by imports (1.6%Q/Q).

While the modest growth in Q2 was a touch better than had been feared, more recent data point to the likelihood of recession in the second half of the year and into 2023. Certainly, the German ifo survey due today is expected to add to fears that the economy is heading for recession, with the headline business climate index expected to fall for the third successive month in August to the lowest level for more than two years, probably below 87 compared to the long-run average of 96.9. We anticipate further deterioration in the indices for both current conditions and expectations.

French business confidence holds steady in August, but still remains well below recent levels
Contrasting with the deterioration recorded in the flash PMIs earlier this week, this morning’s INSEE survey suggested that French business conditions remained broadly stable in August, with the headline sentiment index unchanged at 103 (and actually up 0.6pt to 1 decimal place), to remain above the long-run average (100). Admittedly, the index is some 10pts lower than February’s high and the lowest since the lockdowns in Spring 2021. According to the sector breakdown, the business climate among manufacturers deteriorated again in August, similarly to its least favourable since April 2021, with firms more downbeat about past production and weaker order books. While the headline service sentiment index was unchanged at an above-long-run average reading, firms were again less upbeat about expected demand. And although there was an improvement in retail sentiment, the respective index was still just below the long-run average.

ECB account to be watched closely for further insights into near-term policy path
Focus today will be on the ECB account of the 20-21 July monetary policy meeting, where the ECB’s Governing Council ignored its previous forward guidance and raised the key interest rates by 50bps to bring an end to the era of negative interest rates. While President Lagarde insisted that future policy decisions would from now on be made on a meeting-by-meeting basis, the account will be watched for any further insights into the likely magnitude of tightening to be agreed at the ECB’s 7-8 September policy meeting. The debate surrounding the criteria for activation of the new Transmission Protection Instrument (TPI) will also be of interest.

Japan’s services producer price inflation unchanged at 2½-year high
Japan services PPI figures saw prices rise a further 0.3%M/M in July, to leave the annual rate unchanged at 2.1%Y/Y, this highest since January 2020. This partly reflected a solid contribution from international transportation services, excluding which services PPI inflation was up a smaller 1.4%Y/Y, nevertheless still a 20-month high. Within the detail for July, there were further upwards price pressures from advertising services (up 2.4ppts to 5.4%Y/Y), as well as leasing of IT-related equipment (1.2ppt to 4.9%Y/Y). But perhaps reflecting the ongoing lack of foreign tourists, price pressures of hotel services eased slightly (down 7.4ppts to 13.8%Y/Y).

UK car production grew for third consecutive month, but remains less than half pre-pandemic levels
According to SMMT, UK car manufacturing grew compared with a year earlier for the third consecutive month in July, by 8.6%Y/Y, as there were some welcome signs of supply-chain disruption having eased slightly. Nevertheless, growth was undoubtedly flattered by the particularly low base a year ago. Indeed, the outturn in July was the lowest for eleven months and still less than half the average level for that month in the five years before the pandemic. And the autos sector still faces big challenges relating not least to higher costs of energy and other inputs, as well as waning demand as consumer confidence remains at record lows. Certainly, the CBI’s distributive trades survey for August, due later this morning, is likely to indicate that conditions remain challenging for retailers too as high inflation squeezes household budgets and profit margins.

US Q2 GDP to be revised slightly higher, but remain in contraction
As the Jackson Hole symposium gets underway later today, and ahead of Powell’s keynote speech tomorrow, it should be a relatively quiet day for US economic releases, with just updated Q2 GDP figures due. Upward adjustments to consumer spending and inventory investment suggest a modest positive revision to GDP growth last quarter, although output still likely contracted (-0.5%Q/Q annualised vs -0.9% in the first estimate).

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