Chill in the Air

The labour market has so often been the bright spot of the UK economy in recent years. We’ve got used to there being lots of jobs and very low unemployment. But the temperature has definitely cooled, with slowing job growth and easing wage pressures supporting a cautious path for cutting rates. Elsewhere, as COP talks falter over finance targets, Kier Starmer vows an ambitious 81% emissions cut by 2035. In the US, inflation remains stuck, with a cloudier outlook given Trump's potential economic policies.

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What’s the latest in the UK?

Sluggish UK GDP growth in Q3. The UK economy grew only 0.1% on the quarter (below consensus of 0.2%), down from 0.5% in Q2, and 1.0% on the year. This disappointing growth was mainly fuelled by minimal growth in services, particularly weighed down by a significant 2.0% drop in the IT sector, outweighing the 0.8% growth in construction. Other erratic elements were at play within industrial production. Encouragingly, both consumer spending and business investment showed growth, with the latter growing 1.2% quarter-on-quarter and 4.5% on the year (highest since 2023 Q1). Historic volatility in IT sector performance (it could well rebound strongly), new public spending, and recent interest rate cuts all support a cautiously optimistic outlook. Read more here and here.

Gradually loosening labour market warrants cautious rate cuts. Missing the 287k consensus, employment growth in the UK cooled to 220k in September following a surprising rise to 373k in August. Nevertheless, this easing brings somewhat unreliable ONS Labour Force Survey data in line with the trend in payroll employee numbers. Similarly, likely correcting for volatility in August, the unemployment rate inched up to 4.3%. Meanwhile, growth in average weekly earnings slowed less than expected - 4.8% vs the 4.7% consensus. Looking ahead, wage inflation is likely to slow only gradually amidst impending public sector pay-deals and the National Living Wage hike. Read more here.

While other survey data suggests the cooling labour continued into October. Meanwhile the KPMG/REC Report on Jobs survey suggests the weakening trend in the labour market continued through October, pointing to falling demand for staff and slower wage growth. The permanent placements index dropped to 44.1 in October (below 50 indicates a fall), its steepest decline since March, amid hiring freezes and budgetary concerns. Temporary placements also declined. Permanent starting pay grew at its weakest pace since 2021, and temporary pay gains remained modest rising candidate availability eased wage pressures. Uncertainty over the Autumn Budget was highlighted as a factor, so a rebound might be right around the corner. And London showed some improvement, which also may point a broader strengthening ahead. Read more here.

A short but pressured period of uncertainty in both domestic and global politics has weighed on UK trade. Although goods’ imports fell by £3bn (6.3%) in September, exports fell further, by £3.4bn (10.6%). The story shifts slightly for services, where imports rose (by £0.2bn) but exports fell (c.£0.1bn). Taken together, the total trade deficit widened by £1.5bn to £11.4bn. There are hints at wider economic stories. It seems global investment appetite waned in September, as foreign demand and supply fell most acutely in machinery and transport equipment, plus fuel. Both suggest less general business activity and, in the UK context, both a cause and effect of the slowdown in GDP. Read more here.

The RICS price balance rises in October, brushing off Budget uncertainty. The balance rose to +16 in October, the highest since September 2021, indicating year-over-year house price inflation of 5%. Price expectations for the next three months also surged, despite Budget-related uncertainty, with activity likely pulled forward ahead of tax changes. Sales expectations improved, while new instructions to sell dropped sharply in October, to +14 from +23 in September, narrowing the gap between new buyer enquiries and instructions to sell. However, higher interest rate expectations and reduced policy support, including stamp duty changes, could slow momentum. Real income growth and tight supply should still support modest price gains. Overall, RICS data suggests resilient housing market conditions, but headwinds could temper growth in the coming months. Read more here.

Creative investing. The Mansion House speech is typically where the Chancellor sets out her plans for financial sector policy, so rarely grabs many headlines. Not so this time. Whilst the topics are rather obscure the consequences are hoped to be very real. The big news this time was the Government's approach to pensions policy. Not the tax treatment, that's for future reviews, but how pension funds invest and how they are run. Announcements included plans to combine local government pension funds into 8 "megafunds" and help other schemes invest in UK productive assets, spearheaded by NatWest's own Cushon. Everyone agrees the UK needs to invest more, so the aim here is to create the right institutional arrangements to unlock this. Read more here.

The UK needs to focus relentlessly on growth-busters to shake off our post-2008 economic stupor. That’s according to Bank of England Governor, Andrew Bailey, speaking at Mansion House. Headlines highlighted his pronouncement that Brexit has weighed on the UK’s performance. But it’s Bailey’s overarching point – that openness to trade and foreign direct investment boosts productivity – which really deserves our attention in today’s febrile climate. Together with his clarion call to boost lacklustre levels of both public and private investment. Reforming our overly-fragmented pension system could play a part there. Best act quick, before an ageing workforce drags on growth. Read more here.

What’s the latest in US?

The last mile of getting inflation back to target is proving the hardest. US inflation came in at 2.6% in October, edging up from 2.4%. On a monthly basis, core prices rose by 0.3% for the third straight month. Primary rents rose by 0.3% while owners’ equivalent rent increased by 0.4%. Housing inflation is still elevated, in other words. Together, these two components accounted for a hefty 0.15pp of the increase in the core CPI. A 2.7% jump in used auto prices was another source of upward pressure. The good news is inflation isn’t broad-based across core goods. While flat energy prices, falling shipping costs and the stronger dollar suggest that the near-term outlook for core goods inflation is benign. But looking ahead there’s a bit of a wild card – Trump’s economic policy agenda. Read more here.

What’s the latest in the Global Economy?

After a fraught first week of talks in Baku, the COP bandwagon is wobbling precariously. Keeping global warming within 1.5 degrees had been the guiding light of climate action for nearly a decade. But a new report released last week estimates the world was already within a whisker of that marker at the end of 2023 – 1.49 degrees to be precise. Throw in an absence of key world leaders and negotiations for a new global climate finance target descending into familiar chaos, and it’s fair to say the first week of COP 29 has been challenging. The current $100bn annual commitment to developing nations seems inadequate against estimates suggesting $500bn-$1trn is required. And the COP process itself faces existential critique – key experts including former UN luminaries have declared the whole process unfit for purpose. Against this gloomy backdrop, Prime Minister Starmer has pledged to cut UK emissions by 81% by 2035. Let’s see what the final week of talks will bring.