Economic Highlights

The UK's public-sector borrowing hit £13.5bn in October on the PSNBx measure, some £4.4bn more than a year ago. This was much lower than expected, with consensus looking for a deficit of £22bn. Furthermore, the trend of downward revisions to past borrowing continued, with the estimate of borrowing in the financial year to September pushed lower by £1.6bn. Some of the miss on consensus for October can be attributed to the various energy support schemes. Although the cost of both the Energy Bills support scheme, which saw households receive £400 towards the cost of their energy bills, and the Energy Price guarantee, which resulted in the £2,500 energy price cap for households, was included in the release, there was no estimate for payments to businesses under the Energy Bill Relief Scheme for October, which was not anticipated. Indeed, this may well lead to upward revisions to borrowing in subsequent releases. Meanwhile, as seen in previous reports, central government receipts were boosted by higher VAT receipts, which can be in part attributed to higher inflation, and also by higher labour tax revenues reflecting the tighter labour market. Despite the better-than-expected report for October, amid a weakening economic backdrop and a continuation of energy support schemes, the outlook for the public finances is less than encouraging for the coming years.

Preliminary Durable Goods orders unexpectedly firmed up in October, accelerating to growth of 1.0% month-on-month from 0.3% previously. New orders for transportation equipment led the increase with a rise of 2.1% month-on-month. Orders excluding transportation rebounded to 0.5% month-on-month growth from 0.9% contraction previously. Non-defence capital goods orders ex-aircraft – a proxy for business spending – also rebounded to 0.7% m/m from a 0.8% month-on-month contraction, and core capital goods shipments (an input into the calculation of Q4 GDP) rose by 1.3% month-on-month from a 0.1% month-on-month decline, the largest monthly increase this year. While these nominal figures overstate the state of real business spending, the signals from the latest data are positive and suggest that firms are sticking to their capital spending plans.

However, forward-looking measures are pointing to weakness ahead. The Philadelphia Fed Manufacturing index was dismal in November and its new orders component weakened further. The Empire State new orders subindex contracted, and respondents expect deteriorating business conditions. The average of the five regional Feds surveys’ capex intentions series continues to trend lower. It leads new orders for core capital goods by three months. The latest S&P Global PMI survey data was also downbeat. The Manufacturing PMI dropped from 50.4 to 47.6 (vs 50.0 expected), while Services fell from 47.8 to 46.1 (vs 48 expected). Alongside other indicators that we monitor, these suggest that the US is perilously close to being in a recession.

Survey data in Europe, conversely, provided some better news, although it is hardly rosy. The S&P Global Manufacturing PMI for the Eurozone rose from 46.4 to 47.3 (vs 46.0 expected), with Services unchanged at 48.6 (vs 48.0 expected). This was largely ascribed to the fact that wholesale gas costs declined thanks to a warm October and early November which meant that gas inventories were not depleted. This raises the probability that Europe can make it through the winter without running out of energy (or at least having to pay through the nose for new supplies). Consumers experienced similar relief, with the Consumer Confidence reading rising from -27.6 to -23.9 (vs -26.0 expected). But this also reflects a “less bad” situation rather than a good one.

China’s Industrial Profits declined by 3% year-on-year on a year-to-date basis. On a straight year-on-year basis, they are running at -8.3%. None of this comes as a big surprise as the country continues to grapple with Covid and the ongoing fallout from the real estate sector bust. The government’s recent moves to provide some liquidity support to real estate companies as well as its 20-point plan to exit zero-Covid show that it is mindful of the risk of economic damage and suggests a potential floor to activity. That sentiment was backed up by a reduction in major banks’ Reserve Requirement Ratio from 11.25% to 11%, which frees up some liquidity. But these are containment measures rather than a big new stimulus.