Economic Highlights

July’s money and lending data provide further evidence that a steady improvement in the flow and demand of credit is supporting the economic recovery, although credit growth is unlikely to strengthen significantly until the Bank of England cuts interest rates again. The £2.8bn rise in mortgage lending in July was the largest increase since November 2022. It looks as though the previous falls in mortgage rates are supporting demand. Indeed, the rise in mortgage approvals for home purchases from 60,611 in June to 61,985 in July (consensus forecast 60,500) took approvals to their highest level since September 2022 and suggests that mortgage lending will continue to grow in the coming months. The £1.2bn rise in consumer credit was similar to the average rise of £1.3bn over the previous six months.  Overall, these figures suggest that households’ finances in aggregate are in reasonably good shape and are consistent with consumer spending strengthening over the coming quarters. Futures markets expect the Bank of England to stand pat at September’s meeting.

US Q2 GDP growth was revised up to 3% (quarter-on-quarter annualised) versus the initial 2.8%, driven by stronger consumption (which contributed 2ppts to growth versus 1.6ppts previously). This was partially offset by small downward revisions to the contributions from fixed investment, inventories, government spending and net exports. Meanwhile, US Q2 core PCE inflation was helpfully revised down to 2.8% quarter-on-quarter annualised, versus 2.9% previously. US initial jobless claims for the week nudged down by 2k to 231k. The four-week moving average of initial jobless claims was down by 4k to an 11-week low of 232k. That’s 4% below the one-year high seen at the start of the month, but still 15% above the low in January, which seems consistent with a slowing but not sinking economy.

Preliminary German consumer price inflation declined more than expected from 2.6% in July to 2.0% in August. Consensus was at 2.3%. In Spain prices also eased more than expected, coming in at 2.4%, the slowest pace in a year. Euro area CPI figures came in more as forecast, with the headline rate falling from 2.6% to 2.2% and the core rate from 2.9% to 2.8%. Futures markets are confident that this will allow the ECB to trim rates by another 0.25% later this month, taking the rate to 3.5%, with two more cuts of the same magnitude priced in by year end.

The latest round of Purchasing Manager surveys shows no sign of imminent economic acceleration. The official manufacturing (49.1) and Services (50.3) PMI readings were lacklustre at best, as was the private sector Caixin manufacturing print (50.4). The latest wheeze to boost consumption came in the form of reported plans to allow homeowners to refinance their mortgages, thus taking advantage of lower rates. This might stop them from diverting savings into prepayments instead. Even so, that would not exactly be helpful for banks’ net interest margins, and so there could be costs elsewhere in the economy. It remains hard to see any easy exit for China from its economic malaise.