UK GDP data disappoint again

Chris Scicluna
Emily Nicol

UK GDP firmly on track for Q3 contraction following bigger-than-expected August drop
Economic output in the UK continues to disappoint expectations, dropping 0.3%M/M compared to the BBG consensus forecast of no change. With growth in July revised down 0.1ppt to 0.1%M/M, that left GDP falling 0.3%3M/3M and – not least given the additional disruption to activity following the Queen’s death in September – firmly on track for a contraction over Q3 as a whole. Moreover, the level of GDP in August was unchanged from the pre-pandemic level in February 2020 and about ½% below the pre-pandemic peak.

Manufacturing output drives decline in GDP in August but services down too
The principal source of weakness in UK economic output in August was industrial production, which fell 1.8%M/M following a revised drop of 1.1%M/M in July, due principally to declines in manufacturing of pharmaceuticals and autos. Services output also declined in August, but only by 0.1%M/M following downwardly revised growth of 0.3%M/M, due to less Covid-related activity, as well as a drop in entertainment and recreation due to fewer big sporting events (notably the European women’s football championships concluded at end-July), and a steep drop in retail sales. In contrast, construction again provided support, with growth of 0.4%M/M in August after a rise of 0.1%M/M the prior month.

Underlying UK goods trade deficit hits new high in August on natural gas prices
August trade data flagged a further deterioration in the UK’s external balance, as high natural gas prices saw the value of imports once again outpace the value of exports. In particular, total imports of goods (excluding previous metals) rose 5.7%M/M in August while exports on the same basis rose just 1.2%M/M. So, the underlying goods trade balance (i.e. excluding precious metals) widened more than £2.6bn to a new high of £21.69bn. Including services, the overall trade deficit also widened more than £2.6bn to above £95.5bn, falling just shy of March’s record. Given developments in natural gas prices, we expect the UK trade deficit to widen significantly further over the coming months, also pushing the current account deficit to new highs.

Japanese machine orders fall sharply in August, but still on track for positive growth in Q3
Japanese machinery orders data disappointed in August, with core orders down a steeper-than-expected 5.8%M/M, the most since February. The weakness reflected the steepest drop in orders placed by non-manufacturers (-21.4%M/M) since 2004, due largely to payback in the transportation sector following July’s super-strong showing – in other words, it was likely a reflection of random volatility. In contrast, orders placed by manufacturers surged 10.2%M/M, due principally to a large order in the non-ferrous metals subsector. Of course, machinery orders data are notoriously volatile. And on average so far in Q3, orders were trending almost 1% higher than the Q2 average, which itself saw the strongest quarterly growth (8.1%Q/Q) since Q420. So, despite the weakness in August, the data still suggest that private sector capex will continue to support GDP growth over coming quarters.

Reuters Tankan survey signals further improvement in Japan’s services sector, but increasingly challenging conditions in manufacturing
The Reuters Tankan survey offered a mixed assessment of Japanese business conditions at the start of Q4. On the positive side, the headline non-manufacturing DI increased 4pts in October to 15, the second-strongest reading since the start of the pandemic, due to an improvement in the transportation sector probably reflecting the further relaxation of pandemic-related travel restrictions this month. But Japanese retailers were increasingly pessimistic about conditions as households’ purchasing power continues to be diminished by higher prices. And manufacturers flagged a further deterioration in sentiment in October, with the headline manufacturing DI down 5pts to 5, its joint-lowest reading for twenty months, with firms in the chemicals, autos and metals subsectors particularly downbeat amid elevated cost burdens and weakening global demand.

Euro area IP data to report modest rebound in August; US producer prices to be consistent with slight moderation in pipeline pressures
Euro area industrial production data for August, due this morning, are expected to show a rise of a little more than ½%M/M in August. That would barely make a dent in July’s decline of 2.3%M/M, leaving industrial output on track to subtract from growth in Q3. Later on, US producer price inflation should be consistent with a further slight moderation in pressure; energy prices should fall for a third month while food prices should slow; and our colleagues in Daiwa America expect moderating demand and easing in supply constraints to limit increases in core prices to 0.3%M/M, from an average of 0.4%M/M in the past three months and 0.7%M/M in the first five months of the year; later on, the minutes of the September FOMC meeting will provide further colour on the meeting that saw the FFR target range hiked by a further 75bps to 3-3.25% and the dot-plot was revised to push up the median forecast for the FFR to 4.4% for the end of 2022 and 4.6% for the end of 2023.

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