Economic Highlights

GDP grew by 2.3% m/m in April, reflecting the first leg of re-opening. Services grew by 3.4%, thanks to the return of non-essential retail and outdoor hospitality. And May should extend the recovery trend. BRC data showed that retail sales in May ran 10% higher than in May 2019 (which, for now, is the best like-for-like comparator to use, given the plunge in activity in 2020). The much-heralded pent-up demand was in evidence, funded by an estimated £140bn of excess savings built up during the pandemic. Separate figures from Barclaycard were equally upbeat, reporting that overall spending on debit and credit cards was up 7.6% in May from 2019. With more restrictions being lifted during May, the strong trend will push on into June, delays notwithstanding.

May CPI data saw both the headline and core rates come in higher than consensus expectations at 5% and 3.8% respectively. Around half of the month’s gains were accounted for by airfares, new and used cars and furniture. The first item is bouncing back from a year ago, while the latter items are subject to short-term supply-chain bottlenecks. Thus the market remained happy to support the Fed’s “transitory” inflation narrative. This was supported to some degree by the University of Michigan’s monthly survey of inflation expectations, which declined, although remained near multi-year highs. The reading for one year ahead fell -0.6% to 4.0%, and 5-to-10-year inflation expectations fell -0.2% to 2.8%.

Data revisions showed that the Eurozone’s first quarter recession was less bad than initially reported, with the economy contracting by -0.3% q/q, rather than -0.6%. Taking small upward revisions to previous quarters into account, the shortfall in output relative to Q4 2019’s pre-pandemic level is now -5.1% rather than -5.5%, meaning there is more resilience than had first appeared to be the case. Base effects from the revisions lay the groundwork for faster annual growth for 2021 as a whole too. Meanwhile the ECB left policy unchanged while slightly nudging up its own outlook. It, too, espouses the “transitory” inflation narrative.

The sequential growth of total social financing (TSF) accelerated to +11.1% in May after a dip in April (+9%), broadly back to the average in recent months, primarily on larger government bond issuance. Loan growth moderated but remained robust, particularly in medium-to-long term loans to corporates. The data is consistent with a moderate tightening of policy, with the aim of maintaining financial stability.