Unease Market on Inflation Expectations

Second quarter GDP for Australia met the market’s expectation at 0.9%, 3.6%yr. As expected, household consumption drove growth in the quarter, consumption’s strong 2.2% gain in the 3 months to June coming as a result of the economy’s progressive re-opening and as spending was supported by both robust nominal income gains and a further reduction in the savings rate. In coming months households will feel the full effect of the rapid rise in interest rates and the hit to real incomes from historic inflation, limiting further upside. We continue to expect from historic inflation, limiting further upside. We continue to expect consumption growth to decelerate to a pace well below trend form fourth quarter 2022 through end of 2023, taking GDP growth with it. At December 2023, annual GDP growth is expected to have slowed to just 1.0%yr.

Over in the US, this week’s mixed data highlights the variable conditions faced by businesses across the nation. The ISM services PMI edged higher in August; however respondents seemed cautions on the outlook, with the production and new order indexes printing above 60 as employment held around 50- the divide between expansion and contraction. In stark contrast, the S&P Global services PMI was very weak, coming in at 43.7, around 3.5 points below the July read. Our take on these two outcomes is that large service providers have the market position and pricing power to weather a weak economy, the smaller provides picked up by S&P Global do not. The combined effect seems most likely to be a stagnant economy, the latest Beige Book indicating economy activity was unchanged, on balance.

The ECB’s decision, concerns around the intensity and breath of inflation and the risk of de-anchoring inflation expectations were clearly front-of-mind for the Committee. Indeed, they now see annual headline inflation at 8.1% in 2022 and holding above target to end-2024. Regarding growth, the ECB’s sanguine baseline view sees output growth only stalling to March 2023 before a robust rebound takes hold, with 1.9% growth forecast through 2024.