Economic Highlights

Plenty of economic fodder in the UK last week, and a very mixed bag of it, too. Inflation in September remained relatively subdued at +2.9% (core CPI) y/y. However, everyone knows that this is very much the calm before the storm, thanks to favourable base effects and before we see the real impact of supply chain squeezes and energy and fuel price increases. Producer input prices are up a whopping 11.4% y/y. Higher activity levels are boosting the government’s finances, with the monthly deficit again undershooting estimates but still a big number (£21.8bn) compared with the pre-Covid trends. We certainly don’t expect the chancellor to give much away with this week’s budget. Retail sales for September (-0.6%, ex-fuel, m/m) disappointed, mainly owing to further Covid influences. But the latest PMI data was more upbeat, with services well ahead of expectations at a reading of 58.0. This remains a very hard recovery to read, although the underlying trends point towards a shallower but still meaningfully positive trend for now.

The US PMI releases were similar to the UK’s in many ways, with the composite measure rising from 55.0 to 57.3, buoyed by a surprise jump in the services index from 54.9 to 58.2. At the same time, manufacturing fell further than forecast to 59.2 from 60.7. Price pressures in the supply chain and a squeeze in the labour market were widely reported. There were no problems reported in demand for houses, with existing home sales of 6.29m (annualised) in September. The trend has picked up again after a lull, possibly as buyers rush to lock in low mortgage rates. And with both new housing starts and new building permits falling short of expectations, that suggests the potential for a continuing lack of decent supply.

Europe failed to match the UK and US with its PMI data, with falls in the manufacturing and services components, which both failed to meet expectations. But a composite reading of 54.3 still points to decent expansion, even if the pace of recovery is definitely slowing. And, as in other regions, supply chain issues and the continuing threat of a winter surge in Covid cases are largely to blame. Eurozone core inflation was confirmed at 1.9% for September, but it will not be long before the ECB finally has to think about how to react to inflation finally hitting (and breaching) its 2% target.

Aggregate home prices in China’s 70 largest cities fell marginally in September, with that being the first negative month-on-month reading since April 2015, when the government and PBoC were actively dampening the economy. They are at it again now, deliberately trying to reduce speculation in the real estate market to create more sustainable economic growth for the longer term. But, as we see with the Evergrande insolvency threat, the transition is a tricky one, and there might yet be further downgrades to near-term growth forecasts before policy is relaxed again.