Updated UK fiscal strategy due this week

Emily Nicol

Japanese Q3 GDP growth to have slowed sharply, October’s CPI inflation expected to have jumped
After a quiet start to the week, tomorrow will bring the first estimate of Japan’s Q3 GDP. Our colleagues in Tokyo expect growth to have slowed sharply by 0.8ppt to just 0.1%Q/Q – slightly below the Bloomberg consensus of 0.3%Q/Q – with last week’s consumer spending numbers suggesting that private consumption provided little support last quarter, while net trade is expected to have been a drag. Wednesday’s machinery orders data for September will provide a guide to private capex in the current quarter, while Thursday’s goods trade report will be watched for further signs of weakening external demand at the start of Q4. Attention on Friday turns to October’s CPI inflation figures, with expectations for headline CPI to have jumped 0.6ppt to 3.6%Y/Y. While the upwards shift will in part reflect higher food prices, the Tokyo inflation figures suggested that prices for eating out rose at the fastest pace since 1990. But the increase will largely reflect base effects associated with the government’s previous mobile phone tariff discount.

Euro area IP to post modest growth in September but maintain sideways trend in Q3
Euro area industrial production figures for September gets the week’s data calendar underway this morning. Data published by the member states have been mixed, but overall we anticipate euro area IP to have risen by a little more than ½%M/M, despite an easing in supply constraints and associated sizeable boost to autos output, to leave output broadly flat over the third quarter. This notwithstanding, the second estimate of Q3 GDP (tomorrow) is expected to confirm positive growth of 0.2%Q/Q, a marked deceleration from the pace of recovery in H122 when growth averaged 0.7%Q/Q, but firmer than surveys had originally suggested. As such, while employment is likely to have maintained an upwards trend in Q3, the rate of increase is also expected to have slowed from 0.4%Q/Q in Q2. September’s goods trade figures (tomorrow) will likely suggest that net trade was a drag on GDP in Q3, with construction output numbers (Thursday) similarly set to signal contraction last quarter. Thursday will also bring an updated estimate of euro area HICP inflation in October, including a detailed component breakdown and additional measures of underlying price pressures including the ECB’s trimmed mean figures. The flash release saw headline inflation jump 0.8ppt to a record high of 10.7%Y/Y, with the core rate up 0.4ppt to 6.4%Y/Y.

UK labour market, CPI and retail sales figures in focus this week
A busy week for top-tier UK releases includes labour market (tomorrow), CPI (Wednesday) and retail sales data (Friday). Surveys suggest that employment dropped further in September consistent with the deteriorating economic backdrop. But, not least due to continued weakness in labour force participation, the unemployment rate is expected to have moved sideways at 3.5%, implying a very tight jobs market. Inflation figures will be a key focus too, with the step-up in household energy bills last month likely to see headline inflation jump again in October: we forecast an above-consensus rise of 0.8ppt to 10.8%Y/Y. Indeed, when excluding food and energy, core inflation could have moved sideways at an admittedly still-elevated 6.5%Y/Y. Meanwhile, retail sales data for October might well report a modest bounce following September’s bank holiday dampened demand for goods. But these data are also likely to illustrate the deterioration in households’ purchasing power, with limited spending on non-essentials and big ticket items. And the latest GfK consumer confidence survey (Friday) seems bound to offer a gloomy outlook for near-term spending prospects too.

UK fiscal strategy and OBR forecasts to be closely watched on Thursday
Thursday will also see UK Chancellor Hunt present his long-awaited fiscal strategy alongside updated OBR forecasts for the economy and public finances. This follows Hunt’s decision to reverse the majority of the measures announced in Kwarteng’s disastrous ‘mini-budget’ on 23 September. But while the Treasury estimated that the U-turn on many of Kwarteng’s measures saved roughly £32bn, not least due to higher debt interest payments and the significant cost of the energy price guarantee through to next April, reports suggest that the OBR will estimate that borrowing in 2026-27 will be around £70bn higher than previously estimated in March. As a result, sizeable spending cuts would suggest a return to fiscal austerity while tax hikes (including the lowering of the threshold for the 45p top rate of income tax from £150k to £125k) might also be difficult for Conservative party backbench MPs to stomach. Given the implications for the inflation outlook and impact on monetary policy, the government’s decision on the energy price cap from April will be of particular interest. Also important for the outlook for rates will be the extent to which cuts in public spending and tax increases will be back-loaded beyond the monetary policy horizon and indeed beyond the likely date of the next general election. Separately, BoE Governor Bailey and several MPC members including the newest external member Dhingra will be questioned by the Treasury Select Committee on the MPC’s November Monetary Policy Report on Wednesday.

US PPI, retail sales, IP and housing market indicators in focus this week
The week ahead brings a number of top-tier US releases, kicking off tomorrow with October’s PPI figures. In line with the consensus, our colleagues in Daiwa America expect producer prices to have risen 0.4%M/M, to leave the annual rate down 0.1ppt to 8.4%Y/Y, although attention will be on the services inflation component which had accelerated in September. Attention on Wednesday will turn to October’s retail sales and industrial production releases. Sales are expected to receive a sizeable boost from autos last month, in part reflecting improved supply, while sales will remain flattered by higher prices: overall sales are forecast to have risen 1.0%M/M, of which half is likely to reflect autos. IP is also expected to have benefited from improved supply bottlenecks in the transport sector, albeit the increase in total output is likely to have remained relatively subdued at 0.1%M/M. The second half of the week will also bring various housing market indicators including, the NAHB index for November (Wednesday), housing starts figures for October (Thursday) and existing home sales for October (Friday).

Chinese retail sales and industrial production figures to give update on economic conditions at start of Q4
Tomorrow will bring Chinese retail sales and industrial production data for October. But despite an easing in price pressures that month, retail sales are forecast to have slowed sharply further at the start of Q4 as renewed Covid outbreaks weighed on demand. Likewise, the PMI surveys suggested that manufacturing output declined in October as demand waned and Covid restrictions disrupted supply.

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