UK Inflation Cools, But Brace for a Sterling Summer Shake-Up
Track the new Labour government's fiscal policies and their effects on the UK economy, particularly inflation in the services sector.
Monday, 15 July, Week 29
The Exchequer's Balancing Act: Fiscal Policy in the UK
Over the past five months, the UK's fiscal policy has been characterised by a gradual shift towards loosening, aimed at supporting economic growth and mitigating the impact of the cost-of-living crisis. This shift was most evident in the Spring Budget 2024, which introduced a further 2 pence reduction in the main rate of employee and self-employed National Insurance contributions, effectively boosting real incomes. This measure, coupled with other initiatives like raising the High Income Child Benefit Charge thresholds, is estimated to increase the level of GDP by over ¼% in the coming years. Despite these recent loosening measures, the overall stance of fiscal policy is expected to tighten over the projection horizon as the impact of past fiscal expansions, including pandemic-related support and energy price shock mitigation, continues to fade.
Currently, the UK's fiscal policy can be defined as moderately expansionary, balancing the need to stimulate economic activity with the imperative of maintaining fiscal sustainability. The government faces a delicate balancing act, navigating between supporting a fragile recovery and addressing concerns about the long-term health of public finances. The recent loosening measures, while providing a short-term boost, contribute to the projected increase in the government's net borrowing position. This delicate balance is reflected in the Office for Budget Responsibility's (OBR) forecast for the UK's Government Budget deficit, which is expected to reach -3.00 percent of GDP by the end of 2024.
Looking ahead to the next five weeks, the focus will likely shift towards the new Labour government's fiscal plans and their potential impact on the UK economy. The government has pledged to prioritise economic growth and address the cost-of-living crisis, but the specifics of their fiscal strategy remain unclear. Market participants will closely scrutinise any announcements or policy signals for clues about the government's spending and taxation plans, particularly in light of the upcoming Autumn Statement. Any significant deviations from the OBR's projections could have implications for the GBP, as investors assess the potential impact on the UK's fiscal sustainability and long-term growth prospects.
Navigating the Economic Labyrinth: The UK's Economic Outlook
The UK economy has experienced a turbulent five months, marked by weak growth, high inflation, and persistent uncertainty. GDP contracted in the second half of 2023, driven by a combination of factors including squeezed real incomes, rising interest rates, and geopolitical uncertainty. However, recent data suggest that the economy may be turning a corner, with GDP growth rebounding to 0.6% in Q1 2024, exceeding initial estimates. This recovery has been supported by a continued easing of inflationary pressures, a pickup in consumer spending, and signs of resilience in the housing market. Despite these positive developments, the underlying pace of growth remains subdued, with business surveys pointing to a more moderate expansion of around ¼% per quarter.
The UK's current economic situation can be characterised as one of fragile recovery, with the economy facing a complex interplay of headwinds and tailwinds. The outlook remains uncertain, with risks tilted towards the downside. The ongoing cost-of-living crisis continues to weigh on consumer confidence and spending, while high interest rates are dampening investment and housing market activity. Geopolitical risks, including the war in Ukraine and tensions in the Middle East, are adding to uncertainty and could further disrupt supply chains and energy markets. On the other hand, the easing of inflationary pressures is providing some relief to households and businesses, and the new Labour government's pro-growth agenda could provide a boost to confidence and investment.
Looking ahead to the next five weeks and beyond, the UK economy faces a critical juncture. The outcome of the general election, the new government's policy agenda, and the evolution of global economic conditions will all play a crucial role in shaping the trajectory of the recovery. Market participants will closely monitor a range of economic indicators for clues about the strength and sustainability of the rebound.
Economic Growth:
GDP Growth Rate QoQ - Measures the change in the total value of goods and services produced in the UK.
Previous: -0.30% (Q4 2023)
Consensus: 0.60% (Q1 2024)
Latest: 0.70% (Q1 2024)
Forecast: 0.60% (Q2 2024)
Development: GDP growth has rebounded in Q1 2024, exiting recession, but the underlying pace of growth remains subdued.
Outlook: The outlook for GDP growth remains uncertain, with risks tilted towards the downside.
GDP 3-Month Average - Measures the average GDP growth over the previous three months.
Previous: 0.8% (Three months to April 2024)
Consensus: 0.70% (Three months to May 2024)
Latest: 0.90% (Three months to May 2024)
Forecast: 0.70% (Three months to June 2024)
Development: The three-month average GDP growth has accelerated, indicating a strengthening recovery.
Outlook: The three-month average GDP growth is expected to moderate in the coming months.
Labour Market:
Unemployment Rate - Measures the percentage of the labour force that is unemployed.
Previous: 4.30% (Three months to March 2024)
Consensus: 4.30% (Three months to April 2024)
Latest: 4.40% (Three months to April 2024)
Forecast: 4.50% (Three months to May 2024)
Development: The unemployment rate has risen slightly, suggesting a loosening labour market.
Outlook: The unemployment rate is expected to continue rising in the coming months.
Average Earnings incl. Bonus (3Mo/Yr) - Measures the average weekly earnings growth, including bonuses.
Previous: 5.9% (Three months to March 2024)
Consensus: 5.70% (Three months to April 2024)
Latest: 5.90% (Three months to April 2024)
Forecast: 5.60% (Three months to May 2024)
Development: Wage growth has remained elevated, but there are signs of moderation.
Outlook: Wage growth is expected to continue easing in the coming months.
Employment Change - Measures the change in the number of people in employment.
Previous: -178K (Three months to March 2024)
Consensus: -100K (Three months to April 2024)
Latest: -139K (Three months to April 2024)
Forecast: -160.0K (Three months to May 2024)
Development: Employment growth has slowed, with four consecutive periods of declining job creation.
Outlook: Employment growth is expected to remain subdued in the near term.
Inflation:
Inflation Rate YoY - Measures the annual percentage change in consumer prices.
Previous: 2.30% (April 2024)
Consensus: 2.00% (May 2024)
Latest: 2.00% (May 2024)
Forecast: 2.00% (June 2024)
Development: Inflation has fallen back to the Bank of England's 2% target, driven by easing food and energy prices.
Outlook: Inflation is expected to rise slightly in the second half of the year due to base effects.
Core Inflation Rate YoY - Measures the annual percentage change in consumer prices excluding volatile items such as food and energy.
Previous: 3.90% (April 2024)
Consensus: 3.50% (May 2024)
Latest: 3.50% (May 2024)
Forecast: 3.40% (June 2024)
Development: Core inflation has eased, but remains elevated, suggesting persistent domestic inflationary pressures.
Outlook: Core inflation is expected to continue moderating, but at a gradual pace.
Housing Market:
Nationwide Housing Prices YoY - Measures the annual percentage change in house prices.
Previous: 1.30% (May 2024)
Consensus: 1.10% (June 2024)
Latest: 1.50% (June 2024)
Forecast: 1.50% (July 2024)
Development: House prices have risen for five consecutive months, indicating a resilient housing market.
Outlook: House prices are expected to continue rising modestly in the coming months.
Halifax House Price Index YoY - Measures the annual percentage change in house prices.
Previous: 1.6% (May 2024)
Consensus: 1.20% (June 2024)
Latest: 1.60% (June 2024)
Forecast: 2.50% (July 2024)
Development: The Halifax House Price Index has also shown consistent growth, supporting the view of a resilient housing market.
Outlook: The Halifax House Price Index is expected to accelerate in the coming months.
Mortgage Approvals - Measures the number of mortgages approved for house purchases.
Previous: 60.82K (April 2024)
Consensus: 59.9K (May 2024)
Latest: 59.99K (May 2024)
Forecast: 62.0K (June 2024)
Development: Mortgage approvals have fallen slightly, suggesting a potential moderation in housing market activity.
Outlook: Mortgage approvals are expected to pick up in the coming months, driven by lower interest rate expectations.
Mortgage Lending - Measures the net flow of new mortgage lending.
Previous: £2.23B (April 2024)
Consensus: £0.9B (May 2024)
Latest: £1.21B (May 2024)
Forecast: £0.82B (June 2024)
Development: Mortgage lending has decreased, but the annual growth rate has turned positive for the first time since October 2022.
Outlook: Mortgage lending is expected to remain subdued in the near term, but could pick up later in the year.
Business Sentiment:
S&P Global Manufacturing PMI - Measures the level of activity in the manufacturing sector.
Previous: 51.2 (May 2024)
Consensus: 51.3 (June 2024)
Latest: 50.9 (June 2024)
Forecast: 51.1 (July 2024)
Development: The Manufacturing PMI has moderated, but remains above the 50 mark, indicating continued expansion.
Outlook: The Manufacturing PMI is expected to remain in expansionary territory, but could face headwinds from global economic uncertainty.
S&P Global Services PMI - Measures the level of activity in the services sector.
Previous: 52.9 (May 2024)
Consensus: 53.0 (June 2024)
Latest: 52.1 (June 2024)
Forecast: 52.5 (July 2024)
Development: The Services PMI has slowed, but remains above 50, indicating continued expansion.
Outlook: The Services PMI is expected to remain in expansionary territory, but could face headwinds from political uncertainty and subdued consumer demand.
S&P Global Construction PMI - Measures the level of activity in the construction sector.
Previous: 54.7 (May 2024)
Consensus: 53.6 (June 2024)
Latest: 52.2 (June 2024)
Forecast: 53.5 (July 2024)
Development: The Construction PMI has moderated, but remains above 50, indicating continued expansion.
Outlook: The Construction PMI is expected to remain in expansionary territory, but could face headwinds from rising interest rates and subdued housing market activity.
Consumer Sentiment:
GfK Consumer Confidence - Measures consumer confidence in the UK economy.
Previous: -17 (May 2024)
Consensus: -16 (June 2024)
Latest: -14 (June 2024)
Forecast: -15 (July 2024)
Development: Consumer confidence has improved for three consecutive months, reaching its highest level since November 2021.
Outlook: Consumer confidence is expected to remain subdued, but could improve if inflation continues to ease and the new government's policies are perceived as supportive.
Retail Sales MoM - Measures the monthly percentage change in retail sales volumes.
Previous: -1.8% (April 2024)
Consensus: 1.50% (May 2024)
Latest: 2.90% (May 2024)
Forecast: 0.40% (June 2024)
Development: Retail sales have rebounded strongly in May, but the underlying trend remains weak.
Outlook: Retail sales are expected to moderate in the coming months, with risks tilted towards the downside.
Retail Sales ex Fuel MoM - Measures the monthly percentage change in retail sales volumes excluding automotive fuel.
Previous: -1.4% (April 2024)
Consensus: 1.30% (May 2024)
Latest: 2.90% (May 2024)
Forecast: -0.30% (June 2024)
Development: Retail sales excluding fuel have also rebounded strongly in May, but the underlying trend remains weak.
Outlook: Retail sales excluding fuel are expected to moderate in the coming months, with risks tilted towards the downside.
BRC Retail Sales Monitor YoY - Measures the annual percentage change in retail sales.
Previous: 0.40% (May 2024)
Consensus: 0.20% (June 2024)
Latest: -0.50% (June 2024)
Development: The BRC Retail Sales Monitor has fallen, indicating a weakening in consumer spending.
Outlook: The BRC Retail Sales Monitor is expected to remain subdued in the coming months.
CBI Distributive Trades - Measures the balance of retailers reporting that sales volumes were up or down on a year ago.
Previous: 8 (May 2024)
Consensus: 1 (June 2024)
Latest: -24 (June 2024)
Forecast: 7 (July 2024)
Development: The CBI Distributive Trades balance has fallen sharply, indicating a significant weakening in retail sales.
Outlook: The CBI Distributive Trades balance is expected to remain subdued in the coming months.
Consumer Credit - Measures the net flow of new consumer credit.
Previous: £0.79B (April 2024)
Consensus: £1.45B (May 2024)
Latest: £1.513B (May 2024)
Forecast: £1.6B (June 2024)
Development: Consumer credit has rebounded, but remains below pre-pandemic levels.
Outlook: Consumer credit is expected to remain subdued in the near term, but could pick up later in the year.
Trade:
Current Account - Measures the difference between the UK's receipts from and payments to the rest of the world.
Previous: £-21.2B (Q4 2023)
Consensus: £-17.6B (Q1 2024)
Latest: £-21B (Q1 2024)
Forecast: £-15.5B (Q2 2024)
Development: The current account deficit has narrowed slightly, but remains elevated.
Outlook: The current account deficit is expected to narrow further in the coming months.
Goods Trade Balance - Measures the difference between the value of goods exports and imports.
Previous: £-19.44B (April 2024)
Consensus: £-16.1B (May 2024)
Latest: £-17.92B (May 2024)
Forecast: £-16.0B (June 2024)
Development: The goods trade deficit has narrowed, but remains substantial.
Outlook: The goods trade deficit is expected to remain elevated in the coming months.
Goods Trade Balance Non-EU - Measures the difference between the value of goods exports and imports with non-EU countries.
Previous: £-6.97B (April 2024)
Consensus: £-5.1B (May 2024)
Latest: £-6.86B (May 2024)
Forecast: £-3.3B (June 2024)
Development: The goods trade deficit with non-EU countries has narrowed slightly, but remains substantial.
Outlook: The goods trade deficit with non-EU countries is expected to remain elevated in the coming months.
A Nation on the Brink: The UK's Economic Crossroads
The UK's economic performance over the past five months has been characterised by a delicate balancing act between a fragile recovery and persistent challenges. While GDP growth has rebounded, exceeding initial estimates, the underlying pace of expansion remains subdued, with business surveys pointing to a more moderate trajectory. The labour market, while showing signs of loosening, remains relatively tight by historical standards, with wage growth still elevated. Inflation has fallen back to the Bank of England's 2% target, but core inflation remains above target, suggesting persistent domestic inflationary pressures. The housing market has shown signs of resilience, with house prices rising for five consecutive months, but mortgage approvals and lending have moderated, suggesting a potential slowdown in activity.
The UK's economic outlook for the next five weeks and beyond hinges on a complex interplay of domestic and global factors. The new Labour government's policy agenda, the evolution of the cost-of-living crisis, the trajectory of global economic growth, and the Bank of England's monetary policy stance will all play a crucial role in shaping the path ahead.
Key Economic Indicators:
GDP Growth Rate QoQ: -0.30%, 0.60%, 0.70%, 0.60%
Unemployment Rate: 4.20%, 4.30%, 4.40%, 4.50%
Inflation Rate YoY: 3.20%, 2.10%, 2.00%, 2.00%
Goods Trade Balance: £-14.13B, £-14.4B, £-17.92B, £-16.0B
Threadneedle Street's Tightrope Walk: The Monetary Policy Outlook
Over the past five months, the Bank of England's (BoE) monetary policy has been characterised by a cautious approach to tightening, balancing the need to curb inflation with the imperative of supporting economic growth. The BoE’s cautious stance reflects the BoE's assessment that the UK economy is facing a challenging combination of high inflation, weak growth, and persistent uncertainty.
The BoE's current monetary policy can be defined as restrictive, with interest rates at their highest level since 2008. The BoE has signalled that it is committed to maintaining a restrictive stance until there is clear evidence that inflationary pressures are sustainably receding. This commitment is reflected in the BoE's recent communications, with policymakers emphasising the need to "return inflation to the 2% target sustainably in the medium term."
Looking ahead to the next five weeks, the BoE's monetary policy stance is likely to remain data-dependent, with policymakers closely monitoring a range of economic indicators, including inflation, wage growth, and labour market tightness. The BoE's August meeting will be particularly important, as policymakers will have access to updated economic forecasts and will need to assess whether the current stance of monetary policy is sufficient to bring inflation back to target sustainably.
Storm Clouds Gathering: Risks to the UK's Macroeconomic Outlook
The UK economy faces a number of risks that could derail the fragile recovery and amplify market volatility in the coming weeks.
Top Three Risks (February - July 2024):
US Inflation Persistence (June-July 2024): Elevated US inflation has fuelled expectations for continued Fed tightening, supporting the USD and creating headwinds for the GBP. Despite some easing in headline inflation, core inflation remains stubbornly high, suggesting the Fed is likely to hold rates at their current level for an extended period.
Key Developments:
US CPI peaked at 3.8% in April before easing to 3% in June, but remains above the Fed's target.
Core CPI has remained sticky, hovering around 3.4%-3.6% for much of the period.
The USD has strengthened against most major currencies, reflecting the Fed's hawkish stance.
Eurozone Growth Fears (May-July 2024): The Eurozone economy has struggled with high energy costs, weak industrial production and geopolitical uncertainty, weighing on the EUR and creating headwinds for the GBP. The ECB's hawkish stance has provided some support, but growth concerns remain a drag.
Key Developments:
Germany entered a technical recession in the first quarter of 2024.
The EUR weakened against the USD for much of the period.
The ECB's rate hikes have provided some support for the EUR, but its outlook remains clouded.
Top Three Risks (July - August 2024):
Chinese Data Disappointment (15 July 2024): Weaker-than-expected Chinese economic data, particularly for Q2 GDP, Industrial Production, and Retail Sales, could weigh on risk sentiment, boosting safe-haven currencies like the JPY and CHF and pressuring growth-sensitive currencies like the GBP.
UK Inflation Shock (17 July 2024): Higher-than-expected UK inflation, particularly for core CPI, could fuel expectations for more aggressive BOE tightening and support the GBP. Conversely, lower-than-expected inflation could weigh on the currency.
Bank of Canada Rate Decision (18 July 2024): A surprise hold by the Bank of Canada could weigh on the CAD and potentially create spill over effects on other commodity-linked currencies, including the GBP.
Conclusion: The UK's Summer of Uncertainty
The UK economy is at a crossroads, facing a complex interplay of domestic and global risks. While recent data suggest a nascent recovery, the outlook remains uncertain, with the potential for both upside surprises and downside disappointments. The new Labour government's policy agenda, the evolution of the cost-of-living crisis, and the trajectory of global economic growth will all play a crucial role in shaping the path ahead.
Key Action Points:
Monitor the new Labour government's fiscal plans and their potential impact on the UK economy.
Watch for signs of persistent inflationary pressures, particularly in the services sector.
Assess the impact of the Bank of England's monetary policy stance on the economy and financial markets.
Stay vigilant about global economic and geopolitical risks, including developments in China, the US, and the Eurozone.
Sources:
Bank of Canada
Bank of England
Bank of Japan
Bloomberg
British Retail Consortium (BRC)
Confederation of British Industry (CBI)
GfK Group
Halifax
Nationwide Building Society
Office for Budget Responsibility (OBR)
Office for National Statistics (UK)
S&P Global
Trading Economics