Lacklustre

UK growth rebounded in Q2, but outlook is clouded
 
Unimpressive. Latest monthly GDP figures confirmed the UK economy recovered from a weak Q1, posting an unimpressive 0.4% rise in Q2, matching market expectations.  Over H1 2018,  GDP growth was unchanged from the last six months in 2017. Indeed, with services output, the main contribution to Q2 growth, losing momentum in June, the outlook is unclear. Further disappointing UK data would cast doubt on the need for the BoE’s latest 25bp rate hike.
 
What squeeze? Services output grew 0.5% in Q2, a thumping pace not bettered in the last 18 months. The main driver? Retail. That embattled sector grew an astonishing 2.1% in a single quarter. How does this fit with the story of UK households having their incomes eroded by inflation? Well, much of the headline growth appears to be a bounce back from Q1’s dismal results.
 
Not so sweet-spot.
The Bank of England likes to point out that business has been pretty good for Britain’s manufacturers. They benefit from a weaker currency when exporting but are still part of the EU’s single market, for now. But it looks like Q2 wasn’t so sweet after all. Manufacturing output shrank by 0.9%, the main contributor to a fall in overall production of 0.8%. It was the metals, electricals, machinery and transport sectors that were weakest. There was some growth to be had. Food manufacturing was up 1.1% and pharmaceuticals up 3.1%, but these weren’t enough to offset falls elsewhere.
 
Stable but not so strong. Traditionally UK house price growth exceeds consumer price inflation.  That trend has broken down lately. House price growth has been lacklustre and the era of double-digit house price rises a distant memory. Halifax’s latest survey reveals prices are back above inflation with house prices accelerating to 3.3% y/y in the three months to July, up from 1.8% in June. That’s the fastest rate of growth since November. Despite this latest improvement, housing market activity remains soft with activity pretty flat.
 
No cheer. In the 3 months to June 2018, the total UK trade deficit widened by £5bn, lifting the deficits of goods and services to £8.7bn. This was mainly due to a weaker exports of cars and aircrafts, and higher imports of unspecified goods. Evidence of Brexit can be seen in lower exports to the EU and rising imports from non-EU. The services surplus of £0.7bn is small, but still a relief. In the 12 months to June 2018 services surplus widened by £3bn as exports outpaced imports.
 
Benign. US core CPI posted a 2.4%yoy in June, the highest rate since September 2008. Headline inflation, however, was unchanged at 2.9% last month thanks largely to softer energy prices. Indeed pipeline price pressures appear to be building, judging from latest core PPI data, keeping the Fed on track for another modest hike in September.
 
Tariffs, shmariffs. China’s export machine is still purring, despite the steady build-up of US tariffs, both real and threatened. Overseas shipments rose 12.2%y/y in July, both the EU and the US delivered strong figures. The caveat is that it’s early days for the tariffs. It will be next month before we get a full month’s tariff effect reading. And it seems that there’s some front-loading happening with exporters pushing goods out the door quick sharp to beat the imposition of the levies.
 
More in the door. There wasn’t just strength on China’s export side, it was also visible on the import side. Somewhat odd given evidence of a slowing economy. But the monthly data is volatile. And tariffs may actually be playing a role here too with goods being imported for re-export. Commodity imports (coal, iron ore, oil) also rose. Perhaps in anticipation of some stimulus (government sponsored infrastructure spending) in response to the slowing economy.
 
Amidst concerns.
Japanese Q2 GDP surprised on the upside, rising 1.9% on an annualized basis, more than reversing a 0.9% contraction in Q1. In other words Japan avoided a technical recession. Phew! Previous quarter’s tailwinds- private consumption (60% of Japan’s economic activity) and capital expenditure were the main drivers of growth in the three months to June. However, rising global trade tensions and increased tariffs particularly auto tariffs suggest capital spending may have peaked. One source of comfort for the Japanese economy is the  Bank of Japan’s extended period of stimulus.