Some revisions matter more than others
It is important to remember that economic statistics are remarkably fluid creatures. Apart from the inflation reports, which are almost never altered, then provisional, revised and final versions of how statisticians see the world can differ quite markedly. Some changes have considerable market impact, others less so. Of course, when central bankers revise their views that can affect markets too.
As one example, the path of the UK economy in recent years is not what we all thought a week ago. New data show that by the end of 2021 the UK economy was 0.6% larger than before the pandemic, not 1.2% smaller as had previously been thought. This moves the UK from the bottom to mid-table in terms of the rebound from the Covid shock; the US leads the way, Germany lags behind. Nevertheless, those changes largely related to 2020-21; the UK economy is still growing sluggishly into 2023, about 1% a year at best, hindered by a lack of investment.
A revised change of view was apparent in the latest remarks from Andrew Bailey, Governor of the Bank of England: “I think we are much nearer now to the top of the cycle. Many of the indicators are now moving as we would expect them to move, and are signalling that the fall in inflation will continue and, as I have said a number of times, I think will be quite marked by the end of this year”. As a result, the money markets decided that on balance the MPC might move later in September, but that could well be the peak.
The latest economic data from the UK support such a view. Business surveys are in line with manufacturing output falling about 5% year on year. The BRC survey of shop sales in August showed a moderate pick-up in spending in August, but that followed a weak July and the underlying trend is poor. Consumer confidence will not be helped by the first noticeable declines in house prices in 14 years. All in all, the British Chamber of Commerce considers that the UK is “on course to avoid a technical recession, but growth is likely to remain so feeble that it will be hard to spot the difference”. In effect it forecasts cumulative economic growth of only 1.4% over the three years 2023-25. “Consistently low economic growth of this nature is comparable to previous periods of economic shocks and recessions such as the oil crises of the 1970s and financial crash of 2008.
Such weakness is not helped by developments in the European economy either. Business surveys suggest that manufacturing across the Eurozone should be falling about 2% year on year. This chimes with weakness in German factory orders and industrial production in July. In turn, Europe is being affected by the slowdown in China. A survey of the services sector PMI showed the lowest reading since December, whilst export data showed another significant drop in August. While a stream of Dutch, French, German and Slovak central bank chiefs all said the ECB governing council’s decision was still open, the market is pricing in a low probability of a hike of 0.25% at next week’s meeting.
This was a week, however, when bond yields generally rose by 0.1-0.2%. What was going on? The answer is that the markets are once again coming round to the view that interest rates will remain higher for longer, so any rate cuts are being pushed back in time. This reflects two points. The first is a further rise in oil prices, reflecting production cuts by OPEC. This will slow down the deceleration in headline inflation into 2024. The second feature was further signs of the relative strength of the US economy, despite the weakness in China, Europe and the UK. The US looks to be growing at least 2-3% a year into the autumn, and some estimates are rather higher. An important survey of the services sector showed a rebound, another survey of the labour market signalled limited layoffs.
Fed Governors have long made it clear that they want to see the labour market soften more, as wage growth remains above the Fed’s 3-4% comfort zone. Nevertheless, in their public comments this week, they emphasised time and again that they were watching the statistics closely. Christopher Waller noted that “there’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue”. Susan Collins was even handed “This context calls for a patient and careful, but deliberate, approach to policy, allowing time to assess the effects of policy actions to date, and then acting appropriately”. Against such a backdrop, then both the initial announcement and any data revisions will help central bankers may up their minds, or revise their views.
Bond yields at the time of writing
% 2 year 5 year 10 year
USA 4.97 4.40 4.28
UK 5.20 4.77 4.50
Germany 3.08 2.61 2.61
Andrew Milligan is an independent economist and investment consultant. This note is offered as general commentary on economic and financial matters and should not be considered as financial advice in any form.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making