Economic Highlights

Consumer borrowing is rising again after more than a year of balance sheet repair, which should be taken as a positive sign for the health of the economic recovery. However, credit growth of £0.3bn in June was slightly below expectations owing to the latest resurgence in COVID case numbers. Pre-pandemic we were seeing average monthly increases of around £1bn. Household cash balances still increased by £9.8bn, providing plenty of ammunition for future expenditure. Small businesses paid back £0.3bn of bank loans, suggesting less need for “lifeboat” funds. Meanwhile large companies borrowed £0.8bn, seen as a sign of confidence in the recovery. There was a final dash for mortgages ahead of the end of the stamp duty holiday, with borrowing hitting a record monthly high of £17.9bn.

Q2 GDP came in at +6.5% (q/q annualised), well below the consensus f/c of 8.4%. That looks disappointing, but remember that annualised data always makes things look four times as big as they are! Furthermore, there were plausible excuses. Inventory drawdowns subtracted more than 1% from growth, and fixed residential investment was also surprisingly weak. Both of these are probably the result of temporary supply shortages rather than a reflection of weak final demand. Indeed, personal consumption rose 11.8%, and is expected to remain robust as re-opening continues and some of the excess savings accumulated during the pandemic are spent.

The Euro area economy rebounded more than expected in Q2, with GDP growth of 2.0% q/q following the 0.3% decline in Q1. On a country-by-country basis France (0.9%), Spain (2.8%) and Italy (2.7%) all beat expectations, but growth in  Germany was slightly weaker than expected at 1.5%. Investec forecasts 4.8% aggregate euro zone growth for the year as a whole. Flash estimates for July inflation saw headline HICP beating expectations and rising again to 2.2% (y/y).

China’s industrial profits grew 20% y/y in June, but fell 7.4% m/m. A more meaningful reading might be the two-year average growth of 8.7%, which straddles the COVID pandemic. Upstream industries involved in processing commodities enjoyed a strong period, with the flipside being that downstream companies felt the drag of higher input costs. This was particularly the case for smaller and privately-owned companies. Strong demand for testing kits and vaccines underpinned the chemical and pharmaceutical sectors.