Economic Highlights

GDP rose strongly in November, rising by 0.9% month-on-month, beating expectations of +0.4%. Overall output has now finally surpassed its level before the pandemic began, although not quite if one were to strip out the contribution from NHS Test & Trace and the vaccination programme. There were positive contributions from all sectors of the economy (Services, Manufacturing and Construction), with the Black Friday sales event deemed to have been a strong influence. It was encouraging to see automotive production rising again as there was a reported easing of semiconductor shortages. No doubt Omicron will have held back some activity in December and the New Year, but the underlying momentum in the economy seems firm. The initial rise in the base rate will have only a marginal braking effect, but there might yet be more of a shock from April when the energy price cap is lifted again.

US economists and investors remain focused on inflation developments. December’s headline Consumer Price Index increase was bang in line with the consensus forecast of 7% (versus 6.8% in November), although the Core (ex-Food & Energy) reading jumped a bit more than expected, from 4.9% to 5.4%. Rising used car prices were again a feature, with some offsetting help from lower fuel prices. There are tentative signs that some of the worst effects of supply chain disruption are peaking, but the concern now is that rising housing rents will take up the baton in 2022. The rise in the headline Producer Price Index of 9.7% illustrates that there is still a decent amount of pressure in the pipeline. Consumers continue to be affected by the inflationary threat, evidence for which came in the University of Michigan’s latest Consumer Sentiment survey, where the reading dropped from 70.6 to 68.8 (forecast 70.0) with the Expectations component weakest. Notable too was the increase in five to ten-year inflation expectations from 2.9% to 3.1%. The Federal Reserve’s greatest concern is that a rising level of inflation expectations starts to influence wage demands. Higher prices and some Omicron-related disruption weighed on December’s Retail Sales, which dropped 3.1% month-on-month versus expectations of being flat.

There was no notable economic data in the Eurozone last week, but it is worth noting the intervention of the French government in its domestic energy supply market. With gas prices remaining very high, electricity prices are following them and such inflationary consequences are unhelpful for politicians already struggling to cope with the latest Covid wave in an election year. Hence the decision by the government to force the country’s main supplier, EDF, to cap tariffs. This has been estimated to hit the company’s operating profit by around €8bn. We offer no opinion on the outlook for the company’s investment proposition, but it is worth noting that popular policy usually has to come at somebody’s expense.

Q4 GDP growth of 4.0% was better than the expected 3.6%, although still the weakest since the outset of the pandemic. Monthly data for December was mixed, with Industrial Output slightly firmer than expected at +4.3% year-on-year (consensus +3.6%). However, Retail Sales missed badly, rising just 1.7% (consensus +3.7%). It was officially noted that the economy is under the ‘triple pressure of demand contractions, supply shock and weakening expectations’. To counter this, the central bank is alone amongst leading nations in loosening monetary policy, and has again cut both the medium (one-year) and short-term (seven-day) repurchase rates by ten basis points to 2.85% and 2.1% respectively.