UK GDP growth softer than expected in July

Chris Scicluna
Emily Nicol

UK GDP growth softer than expected in July; risks rise of a second successive quarterly drop in GDP in Q3
UK GDP was a little more subdued than expected at the start of Q3, rising just 0.2%M/M (versus the median on the Bloomberg survey of 0.3%M/M) following the drop of 0.6%M/M in June. That left it up just 1.1% from the pre-pandemic level in February 2020 but still marginally below the level in January. Indeed, the trend in economic output this year has been broadly sideways, and there was zero growth in July on a 3M/3M basis while the level was also little changed from the Q2 average. The services sector was the main source of growth in July, although the rise in activity of 0.4%M/M was also insufficient to reverse the drop of 0.5%M/M the prior month. Growth in that sector was led by information and communication (1.5%M/M) and health and social work (0.8%M/M), with consumer-facing services overall also up (0.6%M/M). In contrast, industrial production fell for a second successive month (-0.3%M/M following a drop of 0.9%M/M in June) principally due to lower output of energy related to record hot weather, while manufacturing rose a minimal 0.1%M/M. And construction output also fell for a second successive month (-0.8%M/M following -1.4%M/M in June). With business surveys suggesting that economic activity in August lost further momentum, and output in September now set to be hit by the period of mourning following the death of the Queen including the national holiday one week today, there is a good chance of a second successive modest drop of GDP in Q3 following the marginal fall of 0.1%Q/Q in Q2.

UK labour market, CPI inflation and retail sales to be closely watched by the MPC
Looking ahead, there will be plenty for the BoE to digest ahead of its postponed MPC meeting (by one week to 22 September), with the latest labour market data (tomorrow), the August inflation report (Wednesday), and retail sales figures for the same month (Friday) still to come this week. Tomorrow’s data will likely point to ongoing tightness in the labour market, albeit perhaps with further hints of gradual softening, with the unemployment rate expected to remain at 3.8% in the three months to August for the fourth consecutive month. But having slowed in the three months to June, growth in nominal average weekly labour earnings is expected to pick-up again – from 4.7%3M/Y (excluding bonuses) and 5.1%3M/Y (including bonuses) – to remain above the BoE’s comfort zone, albeit at historically negative rates in real terms. Last but certainly not least, due to lower petrol prices, we expect the headline CPI inflation rate to slow 0.2ppt to 9.9%Y/Y. But we expect the core inflation rate to rise a further 0.1ppt to 6.3%Y/Y, underscoring the case for further tightening despite the government’s plans to cap household energy bills.

Japanese business sentiment, machine orders and goods trade report due
A relatively quiet week for top-tier Japanese releases kicks off tomorrow with the MoF’s latest business sentiment survey for Q3, which will also include an update on firms’ expectations for conditions around the turn of the year too and capex intentions for the current fiscal year. This will be followed on Wednesday by the Reuters Tankan survey for September, which will provide a guide to the BoJ’s quarterly Tankan at the start of October. That day will also bring machinery orders data for July, which will provide insight into the near-term investment profile. Thursday, meanwhile, will bring the August goods trade report, with the deficit expected to be little improved from the series-low ¥2.1trn recorded in July amid subdued global demand and ongoing supply constraints. In addition, tomorrow’s goods PPI release is expected to report that inflation ticked higher in August, with imported price pressures to have been exacerbated by the marked depreciation of the yen.

Euro area IP and labour costs figures due this week
It should be a relatively quiet week ahead for top-tier euro area economic data, with highlights being Wednesday’s release of aggregate euro area industrial production figures for July and Thursday’s labour cost numbers for Q2. Based on the member states that have already published data, we expect IP to have fallen by around 1.0%M/M in July. A result in line with our expectations would leave euro area IP up a little more than ½%Y/Y and almost 2% higher than the pre-pandemic level. The Italian IP figures (due today) will provide some further guidance. In addition to the latest euro area goods trade report (Thursday), Germany’s ZEW investor survey for September (tomorrow) is likely to mirror the deterioration in sentiment reported in last week’s Sentix survey.

Of more interest in the second half of the week will be euro area labour costs growth, which is expected to have fallen back in Q2 from the sharp pickup to 3.8%Y/Y in Q1 on special pandemic-related payments, to a level that should suggest that second-round effects of inflation remain relatively limited. In terms of inflation, Friday will bring updated euro area figures for August. The flash estimates showed consumer prices rising 0.5%M/M to push the headline HICP rate up 0.2ppt to a new series high of 9.1%Y/Y. This was in spite of a drag from petrol prices, which resulted in a further modest easing in energy inflation, although that still accounted for more than 40% of total inflation. Core inflation rose a stronger-than-expected 0.3ppt to 4.3%Y/Y, suggesting a further increase in domestically-generated pressures.

Following a Reuters report today suggesting that many policymakers saw a growing probability that the ECB will need to take interest rates into restrictive territory, with the deposit rate needing to rise to 2% or more, and a report on Friday suggesting that plans for QT could discussed next month, influential hawkish Executive Board member Schnabel is due to give welcoming remarks at an annual research conference (today), while Chief Economist Lane will provide opening remarks at a money-market group meeting (Wednesday).

All eyes on US CPI report ahead of next week’s FOMC meeting
Ahead of the forthcoming FOMC meeting (21 September), the focus this week will be on tomorrow’s release of the August CPI report. In line with the Bloomberg consensus, our colleagues in Daiwa America expect consumer prices to have fallen (-0.1%M/M) for the first time since May 2020, to leave the annual rate down 0.5ppt to 8.0%Y/Y, a six-month low. But this likely principally reflected a further drop in energy prices. Indeed, while there may well be additional downwards pressures from certain sectors more acutely affected by the pandemic – e.g. travel-related expenses – underlying price pressures are likely to have remained firm, with prices of core items forecast to rise 0.3%M/M (vs 0.5%M/M in the previous twelve months), to leave the annual rate back above 6%Y/Y. The latest PPI numbers (Wednesday), retail sales and industrial production (Thursday) will also be closely watched, as will the University of Michigan consumer sentiment survey (Friday). 

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