U.S.: Mixed signals on likelihood of monetary tightening
Real GDP increased at an annualised rate of +1.5% q/q in Q3, compared with +3.9% in Q2. Consumption was up +3.2% and, after stripping out inventories, GDP increased by +3%. Investment contracted by a sharp -5.6%, while core inflation increased by only +1.3% annualised. As expected, the Federal Reserve announced that the Fed Funds rate was left unchanged at 0%. The accompanying statement had a subtle mix of slightly more hawkish and dovish changes but a more significant change was that the Fed explicitly mentioned the “next meeting” as a potential time for liftoff, a possibility markets had heavily discounted beforehand. Even so, other recent data have been weak. Consumer confidence dropped -5 points to 97.6, with respondents indicating that there were fewer jobs available and that they were harder to get. Durable goods orders fell -1.2% m/m, the second consecutive loss, and by -3% y/y. Orders for non-defence capital goods (ex-aircraft) also fell for a second month and contracted by -7.3% y/y. Housing data were mixed in September as existing home sales increased by +4.7% m/m while new home sales, likely affected by a +13.5% y/y price increase, dropped -11.5%.
UK: Slowdown, despite growth in services
In Q3, GDP growth slowed to +0.5% q/q from +0.7% in Q2, in line with our forecast but below consensus expectations. The slowdown was driven largely by the construction sector (-2.2% q/q) and the manufacturing sector (-0.3% q/q). Activity in the services sector increased by +0.7% q/q (compared with +0.6% in Q2) and contributed +0.6pps to GDP growth, mainly because of a pick-up in financial services. The GDP breakdown will be published on 11 November. We expect consumer spending will have remained the main driver of growth in Q3, reflecting advances in real wages and a recovery in the labour market (unemployment, at 5.4%, is at its lowest level since mid-2008 equivalent to a +140,000 increase in employment). GDP growth is expected to be +2.4% in 2015 but slow to +2.2% in 2016. We expect the Bank of England will increase interest rates in Q2 2016, for the first time since 2008, but uncertainty related to the referendum on EU membership remains a key downside risk to the economy and delays in monetary policy tightening are likely.
South Korea: One-off boost or clear signal?
Preliminary data suggest that GDP growth accelerated to +1.2% q/q in Q3 (+0.3% in Q2). Domestic demand was the main driver, with government expenditure (+1.9% q/q), investment (+2.9%) and private consumption (+1.1%) rebounding sharply. This upturn reflects cyclical factors rather than structural trends. In particular, consumption recovered as risks of the Middle East Respiratory Syndrome virus faded. Investment and public spending increased as a result of a stimulus package deployed by the government. Going forward, economic fundamentals are improving but do not point to a strong and sustained recovery. On the demand side, low export growth and weak new manufacturing orders continue to weigh on the outlook. Producer prices extended their decline in September (-4.5% y/y) suggesting further pressure on corporate margins. Financing conditions remain positive as the Central Bank is still in accommodative mode, with a low policy rate (1.5%) and prospect of a further rate cut if demand shows clear signs of weakness in the coming months.
Eurozone: Not so bad, but not great either
October PMI for both manufacturing output (53.3, unchanged) and services (54.2, up from 53.7) suggest activity will continue to expand at a moderate pace in the coming months. However, momentum in the manufacturing sector softened, with the orders-to-inventory ratio at the lowest level in nine months. Downside pressures on company turnover are not over as selling prices of goods were reduced for a second consecutive month in an attempt to boost sales. The German Composite PMI increased to a two-month high but the manufacturing sector weakened because of softer new export orders, mainly from Russia and China. In France, the Composite index improved to a four-month high (52.2), reflecting advances in both manufacturing and services. All this suggests that Eurozone GDP growth will be +0.4% q/q in Q4, a threshold difficult to surpass since H2 2014. With the boost from low oil prices/low EUR starting to fade, the ECB is expected to announce an increase in its QE programme size and duration (currently EUR60bn per month until September 2016) as soon as December.