Growth Groove

The UK economy continued its strong performance with a robust 0.6% expansion in the second quarter. Households remained cautious but could be a source of strength in coming months and quarters, as underlined by strong retail sales in July. Unsurprisingly, headline inflation inched up last month due to base effects, but aside from that the data signaled good progress along the bumpy road back to 2% inflation. Booming economic growth in the first half looks to be translating into improved job growth, but wage growth is slowing down. Official house prices still show a rebound, despite mortgages having inched up in the first half of the year. The US saw mixed inflation data, but still opening the door for rate cuts.

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What’s the latest in the UK?

A strong first half of the year for the UK economy. GDP grew 0.6% over the quarter with flat growth in June, as expected. On a monthly basis, manufacturing surged by 1.1% and construction grew 0.5%, but the services sector contracted by 0.1% due to weak retail sales. On a quarterly basis, the composition of growth was lopsided. While government spending boosted the economy, consumer spending remained subdued and business investment declined. Similar to the first quarter, the UK grew at roughly double the pace the eurozone. This rapid pace is unlikely to be sustained, with the Bank of England anticipating a moderation in growth to a more sustainable 0.3-0.4% per quarter, but rising consumer confidence, falling rates, and ample savings could lead to a faster rebound. Read more here.

UK inflation was bumpy as expected. CPI inflation rose to 2.2% in July from 2% the previous month, but it undershot the consensus and Bank of England forecast of 2.3% and 2.4% respectively. Core CPI inflation also came in lower at 3.3%. Electricity and gas prices fell, but not as much as they did in July 2023, leading to a rising headline figure. But more importantly, services inflation fell to 5.2%, well below the consensus and BoE estimate of around 5.5%. While erratic hotel prices might have played a role, the decline will be welcome news given the emphasis that the BoE rate-setters place on this measure. Read more here.

Strong economic growth boosts hiring. The unemployment rate fell to 4.2% in June from 4.4% in May, bolstered by a higher-than-expected pace of hiring. Employment growth improved to +97K in June, from +19k in May and payroll employee numbers rose 24K month-to-month in July – the third consecutive monthly gain. Although redundancies increased to 108K, they remain historically low. On the other hand, vacancies fell to 884K, but the drop may be leveling off (they fell just 4k in July). Wage growth slowed down with year-over-year growth in average weekly earnings (excluding bonuses) dropping to 5.4% in June from 5.8% in May and is expected to further decelerate as the impact of the living wage boost continues to fade. The BoE will take comfort from the continued slowdown in wage growth, paving the way for a slow and steady rate cutting cycle. Read more here.

House prices are bouncing back. UK house prices are now back to within a rounding error of their peak, according to the ONS's statistics for June.  Their previous peak was back in September 2022.  Rocketing interest rates then prompted a fall of around 4%, which has now been recovered, on average. But that recovery is far from even.  Regions where house prices were already higher, that had higher borrowing and therefore larger mortgage repayments, have lagged this recovery in prices. London, East of England, and the Southwest all have house prices more than 3% below their previous peak. Whilst Northern Ireland, Yorkshire, the Northeast, and Scotland are seeing prices comfortably surpass previous peaks. Read more here.

A shopping bag half full.  Retail sales are once again growing at a healthy clip. Sales volumes rose 0.5% m/m in July and 1.1% over the latest three-month period. Department stores fared best, up 4% last month, as summer sales and the Euros set the tills ringing. Total retail sales now stand 1.4% above last July, adding weight to the view that a solid recovery in household spending is underway. Yet consumers are still taking home 2% less from the shops than in 2019 so there’s plenty of scope to pack those bags fuller, powering the UK’s economic recovery, in coming quarters. Read more here.

ONS official data might be missing over a million workers. The large gap, based on Payrolled Employees and Workforce Jobs, was highlighted in a recent Resolution Foundation report. This uncertainty has crucial implications for policy-making and economic analysis. ONS estimates are based on the Labour Force Survey (LFS) which suffers from plummeting survey response rates, potential sampling bias, and outdated population estimates. The ONS is working to address these problems, including developing a new Transformed LFS (with no set date for its implementation). In the interim, economists and policymakers must navigate this statistical fog with caution, considering a range of data sources to gauge the true state of the labour market. Read more here.

What’s the latest in the Eurozone?

Decent growth in economic activity and employment in the eurozone.GDP in the single currency area rose by 0.3% in Q2 and by 0.6% versus a year earlier. The figures for the wider EU are 0.3% and 0.8% respectively. Poland tops the table as its economy continues to flourish, growing 1.5%q/q and 4%y/y. Spain’s too, up 0.8%q/q and 2.9%y/y. Germany remains in the doldrums, declining 0.1%q/q. With growth comes jobs, and employment across the eurozone rose by 0.2% in Q2 (0.8%y/y). So overall European policy makers will be taking their August holidays with some ease of mind about the state of the economy. Read more here.  

What’s the latest in the US?

Good and bad in the latest US inflation report. Headline inflation in the US edged down to 2.9% in July from 3% in August, with falling car prices providing much of the impetus. The one-month annualised pace of aggregate inflation was 2%, with the three-month pace at 1.6%. Both were declines from the previous month and are consistent with hitting the 2% target. That’s the good. The bad is that there are still sticky elements underneath, namely rents and car insurance. The disinflation trend in the former has been very slow, while the latter is likely to see further price rises. Still, the reading is soft enough to crack open the door to a rate cut, with this week’s speech from Fed Chairman Powell potentially set to deliver a signal in that direction. Read more here.