Economic Highlights

Although September GDP growth of 0.6% month-on-month (m/m), was a little better than forecast, downward revisions to previous months meant that Q3 growth of 1.3% quarter-on-quarter (q/q) was below expectations of +1.5%. Even so, one wonders whether increases in face-to-face GP visits and more COVID testing really represent what one might describe as productive growth. An early start to Christmas shopping, possibly as a result of feared shortages, lifted retail sales in October, with the year-on-year (y/y) growth rate in total sales values rising to 1.3% from 0.6% in September. On a rolling two-year basis, stripping out COVID-related disruption, sales are +6.3%, which is a strong underlying number. Furniture and electrical goods were most affected by supply chain issues.
 

Inflation hit a 30-year high in October, with a headline CPI rate above expectations at +6.2% y/y. Energy was the main contributor (+30%), and second-hand car prices ticked up again (+2.5%). Food price rises were also a feature (+5.3%). Inflation expectations shot up, especially at the short end of the curve. The 2-year breakeven rate rose 32bps to 3.37%, but gains were lower for later years, with some expectation that the Fed will act to prevent inflation running away as well as a belief that much of the current upward pressure is a temporary phenomenon. But it’s all beginning to hit confidence, with the closely watched University of Michigan consumer confidence index falling from 71.7 in October to 66.8, a level last seen after the 2008 financial crisis. Current conditions (77.7 vs 73.2) and expectations (62.8 vs 67.9) were both lower, with buying conditions for durable goods at their worst levels in more than half a century, reflecting widespread shortages and sharp price increases.
 

The ZEW survey of expectations for the economy and financial markets surprisingly perked up from 21.0 to 25.9 in November, laying to rest some of the worst fears about COVID-related disruption in light of the rapid spread of the Delta variant on the Continent.

Industrial production (+3.5% y/y) and retail sales (+4.9% y/y) came in above expectations in October, although, industrial production growth remained weak in m/m terms. Improvement in the auto industry boosted both industrial production and retail sales sequential growth in October. However, fixed asset investment (+6.1% y/y) softened further, dragged down by further declines in property investment, a situation which is likely to persist given the solvency concerns for several large property developers. Labour market indicators were largely unchanged. The nationwide survey-based unemployment rate remained at 4.9% in October while the 31-city surveyed unemployment rate rose to 5.1% (vs 5.0% in September).
 

Q3 GDP contraction of -0.8% q/q was well below the expected rate of -0.2%, with business spending and private consumption being the main culprits. But the equity market shook this off as investors continue to expect a new stimulus package from the recently re-elected government.