Economic Highlights

The failure of headline CPI inflation to fall in September from August’s 6.7% was a disappointment to most, but it was still below the 6.9% rate the Bank of England projected back in August, which provides it with an excuse not to raise the base rate again now. It leaves inflation on track to fall below 5.1% by December as the Chancellor pledged, helped by the decline in the Ofgem price cap on 1 October, which will subtract a huge 1.3 percentage points from CPI inflation. The decline in core inflation from 6.2% in August to 6.1% in September was due to a further fall in core goods inflation from 5.2% to 4.7%. More worryingly, services inflation popped back up from 6.8% to 6.9%. The fall in core inflation was added to by a further decline in food and drink inflation from 13.6% to 12.1%, but offset by a 3.6% month-on-month rise in fuel prices.

September's public finances figures (£14.3bn of borrowing) continued the recent run of better-than-expected news on the fiscal position, bringing some consolation to the government on a day when it lost two by-elections. Although the Chancellor has ruled out tax cuts in the Autumn Statement on 22 November, he may yet have some scope for tax cuts and/or spending rises in the March Budget. After six months of the 2023/24 fiscal year, borrowing is £19.3bn lower than the Office for Budget Responsibility expected at this stage. What’s more, the recent upward revisions to GDP meant that the debt-to-GDP ratio for the August was revised down from 98.8% to 97.9%. Not that consumers are happy. There was a slump in the GfK measure of consumer confidence from -21 in September to -30 in October. This was the largest monthly fall since December 1994 excluding the pandemic, possibly owing to the lagged effect of the Bank of England’s interest rate increases.

The US retail sales report delivered a healthy update on US consumption. Overall spending increased by 0.7% month-on-month in September – above expectations of a 0.3% month-on-month rise and following an upwardly revised 0.8% month-on-month in August. The details of the report were also positive. The increase in September was broad-based across most kinds of business. Electronics and appliances stores (-0.8% month-on-month), building material and garden equipment dealers (-0.2% month-on-month), and clothing stores (-0.8% month-on-month) were the only exceptions. Moreover, various measures of underlying retail sales (excluding autos; excluding autos and gas; and the control group) all surprised to the upside in September with 0.6% month-on-month increases and were revised up for August. Weekly initial jobless claims fell beneath 200k for the first time since January, coming in at 198k (vs. 210k expected), suggesting a resilient labour market.

The ZEW survey of investor sentiment sent an optimistic signal on Tuesday. German sentiment rebounded sharply from -11.4 to -1.1 in October – its highest level since April. Lower inflation expectations and a sharp increase in the share of respondents anticipating a stabilisation of short-term interest rates drove the improvement in German investor sentiment. Similarly, sentiment towards the Eurozone surged by 11.2 points to 2.3, returning to positive territory for the first time since April. Meanwhile, the Current Situation component for Germany and the Eurozone declined by 0.5 and 9.8 points, respectively. Rebounding investor expectations point to the likelihood of a continued increase in the German Manufacturing PMI. Indeed, the latter has risen slightly over the past two months, though it remained extremely depressed at 39.6 in September.

China's Q3 GDP and September retail sales data beat market expectations, suggesting continued improvement in sequential growth momentum from Q2's low. Real GDP growth recorded +4.9% year-on-year in Q3, stronger than market consensus. Year-on-year growth in retail sales improved in September, led mainly by stronger growth in offline goods sales and Covid-sensitive restaurant sales on favourable base effects. Industrial production growth remained stable in September amid improved export growth with stronger power generation and electric machinery output largely offsetting weaker ferrous metals smelting and computer output.

Fixed asset investment growth also rose in September, led again by infrastructure and manufacturing investment, but the magnitude of improvement was slightly smaller than expected, owing partly to the prolonged drag from depressed property investment.