Economic Highlights

UK output expanded by a modest 0.1% in October, falling short of consensus expectations of +0.4%. Overall production remains 0.5% below where it was in February 2020. Services spending was the sole driver of aggregate growth, expanding by 0.4%. Industrial production declined by 0.6%, reflecting flat output levels in manufacturing and marked declines in utilities’ output as well as in oil and gas production. Even steeper was the fall in construction output, which was down by 1.8%, more than reversing September’s 1.3% rise. Weakness in the industrial sector and in construction appear related to ongoing supply chain problems, hindered by shortages of semi-conductors but also some other inputs. However, against this backdrop brisk rises in employment activities took place, indicative of firms ramping up temporary hiring to cover the Christmas period. On the whole, this was a disappointing report. But as the main factor holding back output appears to be supply issues rather than weaker demand, we would not regard it as a worrying signal for the outlook.

Headline US CPI inflation hit 6.8% (year-on-year) in November, a large increase from October's already high 6.2%, but in line with consensus estimates. This marked the fastest annual CPI rate since 1982. Core CPI (ex-food and energy) jumped by 4.9%. A key driver of the spike in November was once again used car prices, which rose by 2.5% on the month, while apparel prices also increased by 1.3% in November, after holding steady in October. Although price pressures are clearly across the board, rising food and energy prices are of particular concern, with the 6.1% increase in food prices year-on-year, combined with the 33.3% increase in energy prices, disproportionately impacting the living standards of lower-income households, who may not have a large pool of excess savings accumulated during the pandemic to fall back on. Even with the risks from the Omicron variant, these intense price pressures are becoming harder for the Fed to look through, and this report may force it to act sooner than once envisaged. We expect an announcement at this week's meeting to increase the pace of tapering in the New Year, with asset purchases ending as soon as April. That would open up the path to a first rate rise soon afterwards.

Credit growth improved in November, even if it came in below expectations. Aggregate financing increased from CNY 1.6 trillion to CNY 2.6 trillion. Yuan loans rose to CNY 1.3 trillion, missing consensus estimates of CNY 1.6 trillion. Meanwhile, M1 money supply growth surprised expectations and accelerated, but M2 growth eased. Based on this latest data, China’s credit impulse – the year-on-year change in total social financing as a share of GDP – ticked up. It is uncertain whether this marks the beginning of a stronger easing cycle, but at least it does appear to establish that the policy tightening phase is now over.