UK GDP revised up in Q2

Chris Scicluna
Emily Nicol

UK GDP in Q2 revised up, so now estimated to have grown 0.2%Q/Q rather than contracted 0.1%Q/Q
While Truss and Kwarteng will today try to re-establish a modicum of respectability as they meet the OBR fiscal watchdog, and might outline in greater detail their sketchy plans for cuts to public spending including real-terms reductions in welfare benefits, this morning’s GDP data provided a little good news. Contrary to earlier indications, the UK economy is not yet in recession. The level of GDP in Q2 was revised up this morning, and is now estimated to have grown 0.2%Q/Q rather than contracted 0.1%Q/Q. But GDP growth in Q1 was revised down to 0.7%Q/Q. And given revisions to earlier quarters, with GDP now estimated to have contracted by 11.0%Y/Y and not 9.3%Y/Y in 2020, the level of GDP in Q2 was judged still to be 0.2% below that in Q419 ahead of the pandemic. Most expenditure components, bar net trade, are judged to be weaker than previously thought relative to the pre-Covid benchmark. And the UK is now estimated to be the only G7 country yet to have recovered its pre-pandemic level of economic output by Q222.

UK external current account improves in Q2 but deficit remains large and looks set to widen again in H2
The UK remains highly dependent on the kindness of strangers to fund itself but not quite as much as in Q1, with its net borrowing position with the rest of the world declining 1.7ppts in Q2 to a still historically high 5.6% of GDP. In nominal terms, the current account deficit in Q1 was revised down almost £8bn to £43.9bn – still a modern record – and narrowed further to (an admittedly still substantive) £33.8bn in Q2. Excluding precious metals which are typically highly volatile and distort the picture, the underlying deficit narrowed a little further, to £32.5bn and 5.3% of GDP last quarter from (a downwardly revised) £37.0bn and 6.1% of GDP in Q1. Given subsequent movements in the wholesale markets for natural gas, however, the current account deficit looks set to widen once again in the second half of the year.

French inflation undershoots expectations, but Dutch inflation sky-rockets, so euro area inflation still likely to jump to new record high firmly above 9½%Y/Y
Ahead of release of the euro area figures, the flash estimates of French inflation in September undershot expectations, falling 0.4ppt on the EU-harmonised measure to 6.2%Y/Y thanks to slowdown in energy and services components. But Dutch inflation leapt almost 3½ppts to 17.1%Y/Y, as energy prices were estimated to rise an eye=watering 113.8%Y/Y. So, this morning’s euro area figures are still likely to report that inflation has jumped to a new high. We forecast a rise of 0.7ppt in the headline rate to 9.8%Y/Y with the core measure perhaps rising more than ½ppt to as high as 5%Y/Y. Later this morning will also bring euro area unemployment numbers for August, with the rate expected to be unchanged at a record-low 6.6%.

Japanese IP on track for solid growth in Q3 as supply constraints ease
It was a busy end to the week for Japanese economic releases, which, at face value at least, were generally more encouraging with respect to the state of economic recovery this quarter. Certainly, the latest industrial production beat expectations, with output rising for the third consecutive month in August, by 2.7%M/M, as further easing in supply chain disruption brought about strong growth in the semi-conductor sub-sector (up 26.1%M/M). But the flash PMIs implied a deterioration in conditions in the manufacturing sector in September, with output contracting at a faster pace, with the impact of Typhoon Nanmadol bound to be felt in certain sub-sectors. Nevertheless, according to METI, manufacturers were upbeat about production this month, forecasting growth of 2.9%M/M. In any case, even in the absence of any growth, today’s release showed IP trending some 5½% higher than the Q2 average, suggesting a sizeable contribution to Q3 GDP.

Japanese retail sales boosted by higher prices, while consumers remain downbeat
Japanese retail sales were also stronger than expected in August, with growth of 1.4%M/M marking the fifth monthly increase out of the past six and trending so far in Q3 around 0.7% higher than the Q2 average. This also left sales up more than 4%Y/Y. But the recent strength in large part reflects higher prices. Indeed, while adjusting for consumer goods prices, retail sales were actually down more than 1½%Y/Y in August. And today’s consumer confidence survey offered little in the way of reassurance for a likely rebound in consumption over the near term. Certainly, this suggested that households have never been so downbeat about their durable goods purchase intentions since the series began in the early 1980s. Indeed, the relevant index fell 2.5pts in September to 23.2, to be more than 14pts lower than a year ago and the quarterly index almost 5pts below the H122 average. Overall, the headline consumer confidence index fell 1.7pts to 30.8, admittedly still above the pandemic trough (24.8) but nevertheless around 7½ pts lower than at the end of last year. And while there was a further increase in the job-to-applicant ratio to a new pandemic high (1.32x), the decline in the unemployment rate (down 0.1ppt to 2.5%) reflected a drop in labour force participation rather than a pickup in employment.

Chinese PMIs offer mixed signals with a rebound in manufacturing offset by slowing services
There were mixed signals from the Chinese PMIs in September. According to the government’s official release, there was a solid improvement in manufacturing output this month, with the output index rising 1.7pts to 51.5. But this contrasted with the Caixin survey which suggested a more than 3pt drop in the output component to 47.4, suggesting that conditions remained extremely challenging for SMEs. But both the official and Caixin survey suggested that demand for new orders remained subdued, with a steeper decline in overseas orders. And the government’s official non-manufacturing PMI recorded a notable slump in demand at the end of the third quarter – indeed, the new business component fell 6.7pts to 43.1, with the headline activity index down 2pts to 50.6, a four-month low and consistent with just modest growth.

US monthly spending figures likely to remain boosted in part by higher prices
In the US, the data focus today will be on the monthly personal income and spending numbers for August. Hourly earnings suggest only a modest increase in wages and salaries last month – our colleagues in Daiwa America forecasting growth of just 0.1%M/M. While vehicle sales and retail spending numbers point to a drag on spending, overall expenditure might well be boosted slightly by services – Daiwa’s expectations is for growth of 0.3%M/M. But this in part will continue to reflect higher prices, with the core PCE price index expected to rise a further 0.5%M/M, slightly firmer than the average over the past year. This afternoon will also bring the revised University of Michigan consumer sentiment survey, including updated estimates of household inflation expectations.

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