Economic Highlights

The latest S&P Global PMI survey confirmed that the UK economy is still growing, although not at a spectacular rate. The Composite PMI rose from 52.3 to 52.7, with better contributions from both Manufacturing (51.8 vs 50.9) and Services (52.4 vs 52.1). There was some good news on services price inflation, with that figure falling from 56.1 to 55, the lowest level since February 2021. However, there were also some signs of increased shipping costs feeding through to goods prices, with the manufacturing input prices reading rising to an 18-month high of 57.9. The market remains split 50/50 between an August interest rate cut from the Bank of England or one in September.

Q2 GDP growth came in at 2.8% (quarter-on-quarter annualised), well above consensus expectations of 2%. The consumer is still the main engine of growth, with goods spending accelerating, but this was partially offset by weaker services spending, mainly as a result of lower spending on healthcare rather than a slowdown in discretionary purchases. Government spending made a small positive contribution, with defence spending as a key support following the passing of aid bills. Inventory rebuilding offset a continued drag from net exports, but that can only be supportive for so long.  Export growth was subdued, while strong imports resulted from increased domestic demand. This better-than-expected print did nothing to reverse the market’s view that the Fed will cut rates in September. More recent data has been weaker, and signs of a weaker labour market continue to accumulate. Friday’s Core PCE Deflator, the Fed’s preferred inflation measure, came in as expected at 2.6%, maintaining its falling trend.

In aggregate, the eurozone economy is still struggling to gain momentum. July’s HCOB PMI data showed the Composite reading at 50.1, pretty much bang on the line between expansion and contraction. Manufacturing (45.6) remains especially weak, with Germany’s exporters struggling especially as demand from China is poor. It’s Composite reading was 48.7, indicating that the local economy is in a recession. That was also reflected in another weak German IFO survey. France is in a similar position, with its Composite reading at 49.5. The bar for the ECB to cut interest rates for a second time in September is very low.

The People’s Bank of China surprised everyone by following up its earlier 0.10% cuts to its Reverse Repo and 1 and 5-year Prime Loan rates with a 0.2% cut to the 1-year Medium-Term Lending Facility rate, the scope of which was doubled to RMB 200bn. This is a facility to provide cheap liquidity to banks and is another tool being used to try to reignite economic growth, for which the target remains 5%. However, there is limited appetite to borrow and so this policy still feels a little like “pushing on a string”.