Resilient UK Consumers Keep the Economy Out of Contraction in Q2 2023
Economic news and commentary for August 11, 2023
UK GDP, Trade, and Industrial Production
The United Kingdom's economy displayed a promising trajectory in the second quarter of 2023, maintaining its stride of modest gains despite prevailing challenges. Amidst the backdrop of inflation and shifting global trade dynamics, the UK managed to achieve a 0.2% QoQ growth in its GDP in Q2 2023, further reinforcing the country's economic stability. A noteworthy contributor to this growth was the strong 0.5% MoM GDP gain confirmed for June. This substantial upswing offset any weakness observed during the initial months of the quarter. On a YoY basis, the economy has grown 0.4%, showcasing a steady trajectory despite heightened economic uncertainty.
However, amidst the growth figures, the looming specter of inflation remains a topic of concern. The implied price deflator of GDP exhibited its strongest growth in two years, with a notable 2.1% QoQ increase. On a YoY basis, this metric rose to 6.7%, slightly surpassing the 6.5% YoY growth in Q1 2023. The primary driving force behind this persistent inflationary pressure has been the unabated momentum in consumption. Consumer expenditure, the primary contributor to the YoY change in the implied price deflator, accounted for a significant 4.57 percentage points (ppts).
Household consumption maintained its robust trajectory by expanding 0.7% QoQ (real terms) or 2.2% QoQ (nominal terms) in Q2 2023. This surge in consumption was underpinned by increased spending in the recreation and culture sector, restaurants, hotels, and energy-related expenses as services spending remained strong. This trend was mirrored in the data on the services sector’s output, where consumer-facing services witnessed a strong 0.8% QoQ upswing in output. These consistent patterns align with the overarching narrative of strong consumer demand for services, further fueling the economy's forward momentum.
Gross fixed capital formation held steady, indicating that investments remained unchanged during the quarter. Business investment displayed resilience, with a substantial 3.4% QoQ increase; however, this growth was dampened by a notable -6.7% QoQ decline in government investment and a significant inventory contraction of -£4.0 billion. Another critical aspect that influenced the GDP growth dynamics was net trade. In Q2 2023, net trade made a substantial negative contribution, subtracting -0.44 ppts from headline GDP growth. This drag was chiefly attributed to a dip in exports, which managed to outweigh the decline in imports. The decline might have been sharper if not for a significant improvement in the trade balance during June. The month witnessed a 1.8% MoM growth in exports and a -5.8% MoM decline in imports.
The Bank of England has done a lot to try to slow the UK economy and combat inflation, but the progress has only been marginal. UK consumers, bolstered by high wage growth and a tight labor market, refuse to back down from spending and have sent consumption much higher in Q2. As a result, inflation remains elevated. The implied price deflator of household expenditures was 7.4% YoY in this period, down only about 2 pts from the peak of 9.5% YoY last quarter. While this is good news for GDP growth, the UK economy has defied the recession projections so far, it is an issue for the BoE. Strong Q2 growth will give the UK’s central bank more leeway for tightening as it continues the fight against the cost of living crisis in Q3 2023.
Still to come…
10:00 am (EST) - US Consumer Sentiment
Morning Reading List
Other Data Releases Today
French CPI was confirmed at 0.1% MoM and 4.3% YoY in July. Food and energy inflation were both revised up slightly to 12.7% YoY (prev 12.6% YoY) and -3.7% YoY (prev -3.8% YoY).
France's unemployment rate ticked up 0.1 ppts to 7.2% in Q2 2023. The activity rate was stable over the quarter at 73.9%. It grew by 0.3 pts over the year and by 1.1 pts over 2019. This is the highest level on record.
Italy's trade balance improved to €5.3 bil with exports up 0.4% MoM and imports down -3.3% MoM in June. Imports from non-EU countries dropped a sharp -14.5% MoM while EU imports increased 4.9% YoY.
UK industrial production improved 1.8% MoM in June, the strongest growth since August 2020. Manufacturing contributed 1.7 ppts to this growth. Manufacturing output increased by 2.4% MoM, the strongest rise since Nov 2020.
US PPI grew 0.3% MoM and 0.8% YoY in July, up from 0.2% YoY in June.
Core PPI: 2.7% YoY (0.2% MoM)
Processed Goods: -7.8% YoY (-0.6% MoM)
Unprocessed Goods: -24.9% YoY (1.7% MoM)
Services: 4.6% YoY (0.5% MoM)
UK Industrial Production
UK manufacturing surge lifts second quarter growth (ING) - A surprisingly large increase in manufacturing production has meant that second quarter GDP increased by more than we'd expected. For the Bank of England, next week's inflation and wage numbers matter much more.
France Employment
France’s solid labour market is starting to cool (ING) - France's unemployment rate rose slightly in the second quarter. The low point seems to have been passed, and the trend over the next few quarters is likely to be upwards.
US CPI
July CPI: An Escape from the Heat (Wells Fargo) - The consumer price index rose a temperate 0.2% in July, matching consensus expectations. Small increases in food and energy prices helped keep the gain in the headline index in check. Excluding food and energy, the core CPI also increased 0.2%. Continued deflation for pandemic-disrupted categories such as used autos, household furnishings and travel services such as airfares contributed to the relatively modest reading for core inflation.
US inflation boosts case for no further rate hikes (ING) - A second consecutive benign set of inflation prints adds to optimism that the Fed rate hike cycle is at an end and a soft landing is achievable for the US economy. We continue to have our concerns about the economic outlook, centred on the abrupt hard stop in credit growth, but the Fed will soon be in a position to be able to cut rates if a recession materialises.
US CPI: Pieces of disinflation puzzle coming together (CIBC) - The pieces of the US disinflation puzzle are starting to come together. Today’s no-surprise US CPI print provides more evidence that the disinflationary forces are firming and monetary policy tightening is working. Core inflation came in at 0.2% m/m for the second straight month, which in annualized terms is broadly consistent with the 2% target. In year-over-year terms, core inflation edged down a tick to 4.7%.
Core inflation takes another step in the right direction in July (TD Bank) - The July CPI reading was another step in the right direction towards returning price stability. Core inflation matched June's 28-month low of a 'soft' 0.2% m/m gain, which pushed the three-month annualized change down to just 3.1% – its first 'three-handle' since September 2021. Importantly, goods prices have again become a source of deflation, while price growth across non-housing services has slowed from last year's peak of 6.7% to 4%.
The Night They Drove Old CPI Down (BMO) - While two months of subdued core (and supercore) inflation numbers might not define a trend, they do indicate progress in the Fed's fight to restore price stability. Barring a hot August CPI and labour market report, the progress should encourage the FOMC to skip a rate hike on September 20 and, in our view, for the remainder of this exceptional tightening cycle. That can only increase the prospect for a soft landing.
Another decisive step down the disinflation path (EY Parthenon) - The July Consumer Price Index (CPI) report offered more convincing evidence that inflation pressures are abating. Headline CPI rose 0.2% month over month (m/m) for a second consecutive month in July, in line with expectations. But with base effects turning less favorable, headline CPI inflation moved slightly higher for the first time in a year, up 0.2 percentage point (ppt) to 3.2% year over year (y/y). That said, headline CPI inflation is still 5.9ppt lower than its June 2022 peak and moderated to a 1.9% annualized pace over the past three months, the slowest pace in three years.
Housing Costs Persist as Key Driver of Inflation (NAHB) - Consumer prices showed a slight uptick in July, with core inflation remained sticky, ending a streak of 12 consecutive months of steady declines. Despite a slowdown compared to the previous month, the shelter index (housing inflation) continued to be the largest contributor to both headline and core inflation, accounting for over 90% of the increase in headline inflation.
The Consumer Price Index (CPI) Rose 0.2% in July (First Trust Portfolios) - More progress against inflation in July. But don’t get overly excited. The recent surge in energy prices came too late in July to affect the monthly numbers. It will hit in August, and could be enough to reverse the decline in YOY comparisons. Consumer prices rose 0.2% in July, matching consensus expectations, while the twelve-month came in at 3.2%, a huge improvement versus the 8.5% twelve-month change as of July 2022.
Inflation pressures keep receding in the U.S. (RBC) - Easing inflation pressures in the U.S. against a resilient macroeconomic backdrop have been encouraging and have raised hopes that inflation can slow back to the Fed’s 2% inflation objective without a substantial deterioration in the economy. We still think that is unlikely, given early signs that consumer purchasing power is already taking a hit.
US
Below average: US back-to-school sales in 2023 (S&P Global) - The back-to-school shopping season is looking softer this year but still earns a "passing" grade in our forecast, as strong wage growth and easing inflation are enough to keep real income gains positive and retail sales growing.
The Evolution of Short-Run r* after the Pandemic (Liberty Street Economics, NY Fed) - This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates.
The Post-Pandemic r* (Liberty Street Economics, NY Fed) - The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially on long-run measures and tomorrow’s post on short-run r*.
Europe
Sharp monthly increase in Danish consumer prices (Nordea) - In July, Danish consumer prices saw the largest monthly increase since 1986. Consequently, annual inflation rose to 3.1%. This was the first increase in annual inflation since October last year. Also core inflation ticked up.
Sweden: Production and consumption down in June (Nordea) - Production and households consumption dropped in June, largely confirming the weak GDP reading.
NO inflation review: Points to a 25bp hike (Nordea) - Norwegian Core inflation fell to 6.4% y/y in July. While the outcome was slightly higher than Norges Bank's expectations at 6.3%, this is not enough to force a change to Norges Bank’s plans. We expect Norges Bank to hike by 25bp next week.
Asia
Taiwan economy rebounds in second quarter of 2023 (S&P Global) - Taiwan's emerged out of technical recession in the second quarter of 2023, with GDP growth of 1.7% quarter-on-quarter (q/q) after two successive quarters of GDP contraction. The rebound was driven by private consumption, which grew by 12.1% year-on-year (y/y) in the second quarter of 2023.
Emerging Markets
Easing growth momentum keeps price inflation subdued across emerging markets (S&P Global) - The slowdown in growth that had been more prominent in developed markets is now hitting emerging markets going into the second half of 2023. July's PMI data showed emerging markets expanding at the slowest pace in six months, supported chiefly by service sector growth as manufacturing output near-stalled. Rising borrowing costs, weakening trade conditions and inflation have weighed on global economic growth so far this year.
Real Estate
Rising Mortgage Rates and Home Prices Put a Damper on Housing Affordability (NAHB) - Rising home prices and interest rates coupled with elevated construction costs, low existing inventory and solid demand resulted in a significant decline in housing affordability during the second quarter of 2023.
Energy
Crude oil: Production cuts drive short seller exodus (Saxo Bank) - The energy sector has rising strongly this quarter with sentiment experiencing a major positive turnaround as aggressive voluntary production cuts from Saudi Arabia continues to tighten the market. However, the fact the bulk of recent aggressive fund buying in response to a +17% rally has been driven by short covering instead of fresh longs, show a current hesitancy about getting too extended. It highlights the risk when a rally is being driven by a political and economic movtivated production cut, and not a sustained rise in demand driven increased economic activity.
Markets
Lower equity returns during stagflation (Saxo Bank) - Our recent big macro call is that the global economy will enter a stagflation light period defined by higher than expected inflation and an uptick in the unemployment rate and lower real GDP growth as the combination of persistent supply shocks and bad economic policies will weigh on the economy.
Keep calm and carry on? (DWS Group) - Lessons from the Brexit and other attempts at forecasting the perfect entry and exit points in stock markets.
Research
Economic Activity by Race (Philadelphia Fed) - We observe empirical differences between races across various macroeconomic variables for the White, Black, Asian, and Hispanic populations in the U.S. For instance, the Black unemployment rate in the U.S. is more often than not double the White unemployment rate. In this paper, I treat nine macroeconomic variables as noisy indicators of economic activity and estimate an index that measures the economic activity of racial demographic groups in the U.S., called Economic Activity by Race (EAR).
Outlook
Fed minutes, RBNZ meeting and a busy economic calendar (S&P Global) - The week ahead is packed with central bank updates, including Fed minutes and monetary policy meetings in New Zealand and the Philippines. Furthermore, a series of economic releases will be anticipated including GDP data from the eurozone, Japan and other APAC economies. Both the US and mainland China will meanwhile release retail sales and industrial production data, with the former also updating housing market figures. Other data to watch includes labour market and inflation reports from the UK.
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