Downgrades to the UK economic outlook – weekly update 27 November

The Autumn Budget reveals significant downgrades to the economic outlook

The UK Government gave its Autumn Budget address, which revealed significant downgrades to the economic outlook – see full details in our article. Just as other parts of the world have seen upgrades to their growth projections, the Office for Budget Responsibility (OBR) joined others, including the International Monetary Fund and Bank of England in downgrading the UK GDP outlook.

The forecast for 2017 GDP was reduced from 2.0% to 1.5% year on year (yoy) and growth is now expected to remain subdued throughout the forecast period, with downward revisions to business investment and housing spending the main drivers. The OBR similarly cut its forecast for productivity, with no productivity increase expected for this year and only weak growth thereafter – making decent real wage growth that much harder to achieve.

The latest European and US data

Europe continued to signal strong growth, whilst US data disappointed. Purchasing Manager Indices (PMIs) in Europe powered ahead, with Manufacturing PMI defying forecasts for a fall and hitting the 60 mark (from 58.5, 58.2 expected), which has only been achieved once before in the measure’s 20-year history, back in April 2000. Services PMI was also stronger than expected, rising from 55.0 to 56.2 (55.2 expected). As a reminder, any reading above 50 signals expected economic expansion.

By contrast, economic data from the US fell short of expectations, as Durable Goods orders fell from 2.0% to -1.2% month on month (mom) against forecasts of 0.3%. PMI readings were also unexpectedly weaker, with the Composite falling from 55.2 to 54.6, caused by falls in both the Manufacturing and Services components.

Last week’s other events

• Japan’s retail sales dipped in October, after a strong September. National Department Store Sales fell -0.3% yoy, from 4.4% growth in September, whilst Supermarket Sales fell -1.9% from -0.3% previously. The coincident index of business conditions rose from 115.8 to 116.2, but the forward-looking leading index measure slipped from 106.6 to 106.4.
• The UK’s third-quarter GDP was unchanged in the latest revision, at 1.5% yoy, but the details showed that quarter-on- quarter (qoq) Private Consumption rose more than expected to 0.6% (from 0.2%, 0.4% expected). There was disappointment from Gross Fixed Capital Formation, which grew at 0.2% quarter on quarter (from 0.6%, 0.4% expected) and Business Investment, which expanded 0.2% quarter on quarter (from 0.5%, 0.3% expected).
• Eurozone Consumer Confidence rose from -1.0 to 0.1 (-0.8 expected). IFO Business Expectations from Germany rose from 109.1 to 111.0 (108.8 expected), in line with the PMI signals above.

The markets

The US Thanksgiving holiday season seemed to put global markets into quiescence, with equities drifting slightly higher, and government bonds mostly unchanged. The lack of any high-octane announcements from the UK Budget helped gilt yields move slightly lower and caused UK equities to marginally underperform.

One month performance of major asset classes

Equities

Another very quiet week for equities, which ground out incremental gains in most major bourses. The Japanese TOPIX rose 1.0% during the course of the week, whilst the US and Continental Europe were just behind, both returning 0.9% (as measured by the S&P 500 and MSCI Europe ex-UK). The UK was a relative laggard, achieving returns of 0.6% on the MSCI United Kingdom index. Emerging markets also participated, with the MSCI Emerging Markets index up 0.9% on the week.

Bonds

There was very little movement in the sovereign bond markets last week. 10-year gilt yields moved 4 basis points lower over the week to close at 1.25%, whilst the equivalent US Treasuries and German bunds were unchanged at 2.34% and 0.36% respectively.

Commodities

Oil was a little stronger, with Brent Crude rising just over US$1 to end the week at US$63.86 per barrel. Gold was marginally softer, slipping to US$1,288 per ounce, whilst copper rose 10 cents to US$3.17 per lb.

Currencies

The US dollar was a little weaker over the period, with the euro gaining some strength. Sterling closed on Friday at US$1.33, €1.12 and ¥149.

The week ahead

The main points of interest this week are likely to be the latest inflation readings on Thursday. European CPI on Thursday morning is forecast to have risen from 1.4% to 1.6% yoy (Core CPI expected to have risen from 0.9% to 1.0%). On Thursday afternoon, US Personal Consumption Expenditure (PCE) inflation, which is the Fed’s preferred measure, is expected to have slipped from 1.6% to 1.5% yoy, though PCE Core is expected to have risen from 1.3% to 1.4%. Japanese inflation is out late in the evening on Thursday, forecast at 0.2% from 0.7%. Away from the data, we will also be watching for developments on the US tax reform legislation passing through the Senate, which gets back underway after the Thanksgiving break. The daily breakdown is as follows:

Monday – early in the morning, China reports aggregate industrial profits. In the afternoon, US New Home Sales are out, along with the Dallas Fed Manufacturing Activity data.

Tuesday – Eurozone Money supply data are updated in the morning. In the afternoon US inventories data are out, the Consumer Confidence gauge from the Conference Board is reported and the Richmond Fed updates its Manufacturing Index. Late in the evening UK time, Japanese Retail Sales numbers are out.

Wednesday – in the UK consumer lending data, including Consumer Credit and Mortgage Approvals are out in the morning, with broad money supply numbers also updated. Also in the morning, the Eurozone reports on consumer and business confidence measures. The afternoon sees the first round of revisions for US Q3 GDP, and then late in the evening Japanese Industrial Production numbers are out.

Thursday – China reports official Manufacturing and Non-Manufacturing PMI numbers overnight, ahead of global inflation figures released throughout the day (covered above). We will also have the latest Personal Income (0.3% from 0.4% mom expected) and Personal Spending (0.2% from 1.0% expected) numbers from the US to look out for.

Friday – overnight, Japan reports Manufacturing PMI, as does China (the private Caixin measure), with UK Manufacturing PMI out later in the morning. The afternoon has PMI numbers for the US, this time from the Institute for Supply Management, which will wrap the week up.