Recent economic data releases for both the United Kingdom and the Euro area highlight a mixed but generally resilient growth outlook, according to analyses from Brown Brothers Harriman (BBH) and Nomura. In the UK, GBP/USD has strengthened, primarily due to broad US Dollar weakness, despite domestic data presenting a mixed picture. July retail sales volumes in the UK fell by -0.5% month-on-month, partially reversing strong gains from the previous two months. Excluding automotive fuel, retail sales declined by -0.9% month-on-month, which was worse than the consensus expectation of -0.5% and followed a 0.9% increase in June. However, the August UK composite PMI surprised to the upside, rising to a four-month high of 52.5 (consensus: 51.6, prior: 52.2), driven by a sustained turnaround in the service sector that offset slower manufacturing growth [1].
BBH's Elias Haddad notes that market pricing for 50 basis points of Bank of England (BoE) rate hikes over the next twelve months appears too aggressive, given the UK's negative output gap. Haddad suggests that rate-hike expectations may be vulnerable to a dovish repricing, though the UK's favorable growth-inflation mix continues to support the Pound [1].
In the Euro area, Nomura reports that the August composite PMI signaled resilient growth, led by a strong rebound in manufacturing, particularly in Germany and France. The euro area manufacturing output PMI reached its highest level since February 2022. While the services PMI remained unchanged overall, declines in Germany and France were offset by strength in peripheral countries. Price indices within the PMIs fell broadly, with only a slight increase in the services input price index. Both composite input and output price indices declined but remain above pre-Iran war levels. Nomura highlights that business price pressures have not increased following the July re-escalation of the conflict in the Middle East [2].
Consumer inflation expectations in the Euro area, as measured by the ECB’s July Consumer Expectations Survey, continued to normalize. The 3-year ahead median inflation expectation declined by 0.1 percentage points to 2.7%, while the 5-year ahead figure remained steady at 2.4%. Nomura expects the ECB to deliver a 25 basis point rate hike in September, while forecasting no change from the BoE. The resilience in output growth across Europe, despite geopolitical tensions, may alleviate concerns among more dovish policymakers about over-tightening monetary policy [2].
CONCLUSION
Both the UK and Euro area have demonstrated resilience in recent PMI data, with the UK showing a service-led rebound and the Euro area benefiting from manufacturing strength. Despite mixed retail data in the UK and ongoing geopolitical risks, inflation expectations remain contained, supporting a cautious but stable policy outlook. Market participants may need to reassess aggressive rate hike expectations for the BoE, while a modest ECB hike appears likely.