Falling short

After a solid economic performance in H1, the UK’s PMI data suggests an encouraging start to H2. Both the manufacturing and service sector surveys improved, pointing to improved employment growth and more progress on reducing residual inflationary pressures. On the other hand, the Climate Change Committee reported that the UK is off track in meeting its climate targets, urging stronger policies and reduced electricity prices to boost the adoption of low-carbon technologies. In Europe, consumer confidence rose but its PMI indicated a slow start to the third quarter. The US saw robust Q2 GDP growth and strong business activity. But given the good data on inflation, rate cuts feel round the corner.

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What’s the latest in the UK?

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The UK's private sector showed resilience in July. The S&P Global Flash UK PMI Composite Output Index rose to 52.7. Activity expanded for the ninth consecutive month, buoyed by the sharpest upturn in new business in 15 months. Manufacturing output grew at its strongest pace since February 2022, while services activity also accelerated. Employment rose at the fastest rate in 13 months, and business confidence rebounded. However, the Red Sea crisis has increased transport costs, particularly affecting manufacturers. Despite this, overall price inflation slowed to a three-and-a-half-year low. The first post-election survey suggests a positive outlook, though policymakers may remain cautious due to potential inflationary pressures from manufacturing and wage growth. Read more here.

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Optimism among manufacturers fell slightly in July, but should rebound in August. The CBI Industrial Trends Survey showed a significant decline in key metrics: the total orders balance fell to -32 from -18 in June, while the average selling prices balance collapsed to +2 from +20. These declines were unexpected, especially given the usual seasonal improvement in orders for July. The drop in the prices balance suggests potential deflationary pressures, contrasting with modest price increases reported in other surveys. Looking forward, with strong expectations for output growth in August and indications from other surveys pointing to improving manufacturing conditions, both orders and prices are anticipated to rebound, reflecting sectoral resilience and recovery prospects. Read more here.

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Off track for Net Zero. The UK’s Climate Change Committee (CCC) reports the UK is off track in meeting its climate targets. While emissions have significantly dropped in the energy sector due to phasing out coal and increasing renewable energy, other key sectors continue to lag. The CCC stresses the importance of policies promoting the uptake of electric vehicles, heat pumps, and renewable energy. One recommended action is to reduce electricity prices by removing market distortions and policy costs, better reflecting the low running costs of low-carbon technologies compared to fossil-fuel alternatives to encourage greater adoption. Read more here.

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What’s the latest in the Eurozone?

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A slow start to Q3 for the single-currency area. The euro area composite PMI eased to 50.1 in July vs 50.9 in June. The headline softened amid weakness in both services and manufacturing sectors. Germany and France continued to underperform relative to the wider region. On the jobs front, the employment index held steady after six months of strong data. This was led by sharp fall in manufacturing employment, concentrated in Germany. And lastly, speaking again to weak demand, input price inflation accelerated, but output prices rose by less, indicating pressure on margins. Overall, a somewhat sobering start to the quarter! Read more here.

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But both temperatures and consumer confidence are on the rise across Europe. The sentiment index rose 0.7ppts in the EU and 1ppt in the eurozone to take both within a whisker of their long run average. That’s the highest level since February 2022, a period between the post Covid normalisation but before households' felt the full force of inflation's fury. The ECB’s June rate cut no doubt helped, with expectations of more to come. And the euro area economy is in a better place than it was in recent past, while political turbulence in France has been contained, albeit uneasily, and at least for now. Read more here.

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What’s the latest in the US?

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Still waiting for Gadot. The wait for the US recession that many have had pencilled in for well over a year goes on. GDP grew at an annualised pace of 2.8% in Q2, ahead of both the consensus view (2%) and the previous quarter’s pace (1.4%). That’s not to say there aren’t weaknesses. The pace of consumer spending is down markedly from the second half of last year. US consumers have been under-saving for two years, running down Covid-era balances. And it looks like Q2 spending was sustained by lowering the savings rate further still. Consumer loan delinquency rates have been rising, too. Throw in signs of a cooling labour market and it makes for a soft outlook. Still, the bottom line is that the US has been much stronger than economists had expected. Can it continue to surprise to the upside? Read more here.

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Strong growth needn’t put a brake on Fed rate cuts.? And the economic strength looks to have continued into early Q3. US business activity grew at its fastest pace in 27 months in July, according to the flash PMI. An acceleration in already robust services growth pulled the composite output index up 0.2pts to 55.0, despite the manufacturing sector slipping into modest contractionary territory (49.5). Those watching for signs of persistent inflationary pressures will be relieved. Prices charged by firms rose at one of the slowest rates in four years, despite some renewed upward pressure on input costs. Employment growth slowed too, as business confidence dipped ahead of November’s Presidential Election. Read more here.

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There was more good news on US Inflation. The personal consumption expenditure price index, which serves as an important gauge of inflation for the Fed Reserve, rose by just 0.1% monthly and 2.5% annually. Core inflation, which strips out food and energy, showed a 0.2% monthly.? The slowing momentum comes even as economy remains robust, giving confidence to the view that the US is on track for a soft landing. There has now been series of good inflation data over the past three months. And that should enable Fed to cut rates soon. Markets concur, effectively pricing it in as a certainty by September. Read more here.