Economic Highlights

The revisions to Q2 GDP showed that the UK was not in a technical recession (consecutive shrinking quarters), but that was pretty much the extent of the good news. More worryingly, overall activity has not returned to pre-Covid levels as previously believed, and that makes the UK unique amongst G7 countries. That throws a harsh light on the government’s plans for unfunded tax cuts. The 0.1% quarter-on-quarter contraction in Q2 that was originally reported was revised up to growth of 0.2%. The shortfall in longer-term recovery post-pandemic appears to be down to increased saving by households. The optimistic view is that these savings constitute a stronger cushion for consumers now. There was an unexpected surge in Mortgage Lending in the UK in August, with a total of £6.1bn of new loans made, well above the previous month’s £5.1bn and even further above the expected £4.9bn. There were also 74.3k new mortgage approvals, well above any month since January this year and also beating expectations. In many quarters this was viewed as most probably being a last-minute dash for reasonably priced funding.

The main release last week was the US Personal Consumption Expenditure data, notably the Core Deflator element. Any hopes of a reversal of inflation pressures were dashed by a monthly rise of 0.6% in the core reading, leading to the annual rate rising from 4.6% to 4.9% vs an expected 4.7%. The upward pressure emanated from Services rather than Goods. There was some slightly better news from the University of Michigan’s final Consumer Confidence reading, with 5-10-year inflation expectations falling from 2.8% to 2.7%, although one-year expectations rose from 4.6% to 4.7%.

The eurozone’s Headline CPI for September hit double figures, rising from 9.1% in August to 10% on the nose, with the core rate rising from 4.3% to 4.8%. Needless to say, both constituted new records during the euro era. Although the European Central Bank is committed to quashing inflation, its “one size fits all” policy is unhelpful given that inflation rates range from 6% to 25% across the euro members. All this comes at a time when Consumer Confidence readings have plumbed new depths.

The NBS manufacturing PMI increased to 50.1 in September from 49.4 in August while the Caixin manufacturing PMI fell to 48.1 in September from 49.5 in August. The NBS non-manufacturing PMI fell to 50.6 in September from 52.6 in August, driven by a deterioration in service sectors. The NBS and Caixin manufacturing PMIs pointed to different directions for the manufacturing sector in September, potentially due to their differences in sample coverage and survey periods. The truth is that the economy remains much weaker than we have been used to for many years, thanks to the zero-Covid policy and problems in the real estate sector. Chinese industrial profit growth contracted for the second consecutive month on a year-to-date year-on-year basis in August, falling 2.1% in the first eight months of the year. Manufacturing companies are especially severely underperforming and weak demand is not allowing higher input prices to be passed through to consumers. At least that means that China has no inflation problem to speak of, which should allow it stimulate as required.