Economic Highlights

Following July’s 0.6% contraction, the 0.2% month-on-month rise in real GDP in August raised hopes once again that the economy has escaped a recession. But some of the strength of GDP in August was due to temporary factors, and timelier survey measures of activity point to another drop in September. Some of August’s rise in GDP reflected the strikes ending in the education sector. Education output rose by 1.6% month-on-month after falling by 1.7% month-on-month in July. Services output rose by 0.4% month-on-month, but construction output fell by 0.5% month-on-month, as heavy rainfall and lower than average temperatures delayed work. A 0.8% month-on-month fall in manufacturing output resulted in a 0.7% month-on-month drop in industrial production. The housing market will not offer much support for the wider economy. Mortgage demand continues to fall, and the latest RICS House Price Balance Index fell to a new cycle low of -69%. Rightmove reported national house prices to be down 0.8% on a year ago, which will be a lot lower in real terms.

The latest Consumer Price Index print delivered mostly bad news from a market perspective. The main story was that headline CPI came in at +0.40%, which was above the consensus of economists’ forecasts at +0.3%, and also inflation swaps, which predicted +0.25%. It wasn’t just the headline number that came in strong however, as the core CPI measure was running at +0.32%, with decent increases in some of the stickier categories too. It was also a broad-based move, as the Cleveland Fed’s trimmed mean CPI measure (which excludes the biggest outliers) rose by 0.40%. And so, the data cemented the picture that inflation has been ticking up in recent months. Looking at just the last three months, the annualised rate of CPI is now at +4.9%, which is the highest it’s been since August 2022. That’s offering some pushback against the more positive inflation narrative from a couple of months ago. This news helped to push bond yields higher following a rally early in the week.

The latest Sentix Investor Confidence reading defied gloomy predictions by “only” falling from -21.5 to -21.9 versus an expected -24. But with aggregate financial conditions as tight as they have been at any time during the last decade, Europe remains on the back foot. Industrial Production (IP) for August came in at -5.1% year-on-year, but a brief perusal of the long-term chart shows that August is a notoriously poor month for IP data owing to extended holiday periods. Even so, there is very little positive momentum in the European economy at the moment outside some strong areas for tourism.

Total social financing credit in September was stronger than expected, at RMB 4.1tn versus consensus expectations of RMB 3.7tn. This was helped by strong government bond issuance and an increase in new household mortgages, suggesting that the boost from the recent easing in property policies is starting to kick in. There is potential for further monetary easing from the People’s Bank of China, and additional fiscal stimulus, as suggested by recent press reports, could further help to support credit demand.