UK GDP, Household Incomes, and Eurozone Inflation

This morning, UK Q2 GDP came in at 0.2% growth on a quarter-on-quarter basis, meeting market expectations and coming in line with the previous print. Here, the rise in output was steered by 1.2% growth in production as input prices fell, alleviating many of the pressures seen on the sector. This came as services slowed across the quarter, experiencing no growth from April to June. This was downwardly revised from the 0.1% growth figure previously published.

The ONS noted that the greatest positive contribution to growth in the services sector was the rise in output from the UK’s film industry, computer programming and consultancy related services. Accommodation, food and drink services also rose 2.1% as households increased spending on leisure. Meanwhile, the print showed how “the largest negative contribution to growth was from the professional, scientific and technical activities subsector, which fell by 1.3%, with declines in scientific research and development, architectural and engineering activities, and advertising and market research.”

The ONS now estimates the size of the UK economy is now 1.8% greater than pre-pandemic levels, above that of Germany (whose economy is 0.2% larger than before Covid-19) and France (whose economy is 1.7% larger). Nevertheless, the UK’s post pandemic growth has however remained softer than that of the US, Canada, Italy and Japan.

Data out this morning also indicated that business investment rose 4.1% over Q2, marking a marginal rise from Q1’s 4% print but exceeding expectations of 3.4%. Primary drivers of the rise in business investment included investment into the UK’s aviation industry, particularly from the US.

The ONS noted that households’ real disposable income increased 1.2% over Q2, as wage growth ticked up against inflation. Earlier this month we saw how UK wage growth remained at its highest level on record in the three months up to July. On an annualised basis, regular pay excluding bonuses grew by 7.8% to £617 per week despite the labour market showing some signs of slowing down with unemployment ticking up to 4.3%. The survey however noted that real income growth continued to face headwinds given rising costs of food and transport.

This comes as the household saving ratio grew to 9.1% over Q2, up from 7.9% in Q1. Here, the ONS stated that “this upward movement was driven by a rise in social benefits other than transfers in kind of £10.2 billion, together with increased wages and salaries of £6.0 billion.”

The rise in household savings is a trend seen across much of Europe at the moment as people try to recover from a protracted period of falling real wages and rising bills. When compared against other countries, as we looked at earlier this week saving’s, EUROSTAT recorded that Germany’s household saving’s ratio had risen marginally to 20.03% in March 2023. The same survey showed Italy’s household saving’s ratio at 9.64%, Slovenia’s at 12.93% and France’s at 17.83%.

This morning will see attention turn to Eurozone HIPC data, where markets will be looking for any indication on the trajectory of inflation across the currency union. The preliminary data will be released at 1000 this morning where the general consensus is projecting a print of 4.5% (annualised), marking a considerable downward move from last month’s 5.3% figure. The core index is also expected to fall from 5.3% to 4.8%.

Today’s inflation data follows the ECB’s Policy Meeting on Thursday 14 September which saw them raise rates by 25bps on their main refinancing operations (to 4.5%), marginal lending facility (to 4.75%) and the deposit facility (to 4%). Behind the decision, the ECB citied in their Monetary Policy Statement how “inflation continues to decline but is still expected to remain too high for too long”. As such, markets will be keeping a close eye on any subsequent reaction from policy markers to gain an insight into the possible future path of Frankfurt’s monetary policy.