Expect UK Growth To Moderate This Quarter


UK GROWTH TO MODERATE IN Q3 In the UK economic growth is expected to continue but at more ‘normal’ rates through the second half of the year. The economy bounced back strongly in Q2, with GDP increasing by 4.8%q/q, as reopening effects boosted output, particularly in hospitality industries. The Bank of England predicts a moderation in the pace of expansion to around 3% in Q3 and 2% in Q4, resulting in full-year growth of about 7¼% and economic output returning to its pre-pandemic level by the end of the year. That moderation in near-term growth is backed up by the PMI survey, with the composite index (reflecting manufacturing and services output) easing for a third month to 54.8 in August.

At the same time, UK business confidence resuming its upswing in August after dipping slightly in the prior month. Overall confidence increased by 6 points to 36%, the highest level since April 2017, driven by improvements in firms’ trading prospects, notably in parts of services, as well as in optimism about the wider economy. Expectations for pay growth, however, were at their most elevated since the start of the pandemic. A key question going forward is how quickly reported supply constraints, such as for raw materials or staff, will be resolved in the coming quarters. For July GDP (Fri), we look for a monthly increase of 0.8%, with the so-called ‘pingdemic’ in some sectors of the economy potentially precluding a stronger increase. Services output, covering most of the economy, probably expanded by 0.8%, but we see a risk of a fall in manufacturing output, affected by supply issues,. That monthly pace of GDP growth, if maintained in August and September, would lead to Q3 growth of around 2.5%, not far off the Bank of England’s current projection.


ECB MIGHT SLOW PANDEMIC STIMULUS

It’s a potentially big week for the European Central Bank (ECB), with a policy update due on Thursday. The last meeting in July was the first since it adopted a new monetary policy strategy, including a symmetric 2% inflation target with some tolerance above the target. The ECB adjusted its forward guidance on interest rates, in effect raising the hurdle for a first increase. The focus for next week’s meeting is expected to be on whether the pace of asset purchases under the Pandemic Emergency Purchase Programme (PEPP) will be scaled back in Q4. It had been raised to about €80bn a month since the start of Q2 (in addition to the ongoing €20bn a month under the regular Asset Purchase Programme), but there is some pressure to rein back some stimulus, especially after Eurozone inflation jumped up to 3.0% in August while Q2 GDP growth also beat expectations. Hawkish ECB comments from the heads of some northern European central banks over the past week, including the desire to reduce asset purchases, have attracted significant market attention, although it is not clear how widely their views are shared. The central view at the ECB will likely be more cautious, with more weight attached to risks relating to the delta variant and indications that global growth may be moderating. The ECB’s new forecasts will upgrade short-term inflation, but the ‘transitory’ argument for medium-term inflation will likely prevail. Overall, a vigorous debate among policymakers ahead of Thursday’s announcement could result in a compromise for a slight reduction in the pace of purchases, but that’s by no means assured. Any reduction will likely be limited, with a majority of policymakers probably preferring to maintain purchases under PEPP at a higher pace than in early 2021 when purchases were about €60bn a month. Elsewhere, the Reserve Bank of Australia (Tue) and the Bank of Canada (Wed) will also provide policy updates. Neither central bank is expected to make changes to their policy settings. There was a surprise contraction Canadian Q2 GDP, while Australia is contending with the delta variant which could lead to a contraction in Q3.


US PAYROLLS DISAPPOINT

Global risk sentiment over the past week was broadly positive ahead of today’s US labour market report. Markets shrugged off signs of weakening activity in China following declines in the August PMI reports due to the delta variant, including falls in the Caixin surveys into contraction territory for both manufacturing and services. The main market focus was the US labour market report which attracted more attention than usual. Some Federal Reserve policymakers have noted that a further improvement in the US labour market will be a crucial determinant of when it will start to run down its asset purchase programme. In the event, nonfarm payrolls disappointed relative to expectations. The US economy added just 235k jobs in August, significantly below expectations for over 700k and well down from July’s upwardly revised gain of 1.1m jobs. The Fed has yet to announce an explicit timetable for the start of the ‘tapering’ of its $120bn a month of purchases. There is speculation that it could be announced as soon as the 21st/22nd September policy meeting, but today’s employment figures increase the likelihood of a delay until a later date, possibly November. Such caution may also be justified if officials attach more weight to concerns about the delta variant or potential political uncertainties surrounding the debt ceiling. The outturn weighed on the US dollar, sending the pound up towards $1.39 at the time of writing, while Treasury yields were volatile. Next week is holiday-shortened in the US (public holiday on Monday), with only second-tier releases and final Fed speeches ahead of the ‘blackout period’ before September’s FOMC meeting. The following week (commencing 13th) will see some important US data releases, including CPI and retail sales.



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