Staying in the groove

The UK economy showed signs of growth in August, having a hit a softer patch earlier in the summer. Sustaining the momentum is key so encouragingly the Regional Growth Tracker suggests the UK remained in the growth groove during September. House prices are also on the up again, fuelled by improving mortgage affordability Meanwhile, the Bank of England's credit conditions survey reveals increased mortgage credit supply and defaults steady at a low level. But it might take a while for the economic turnaround of 2024 to be felt everywhere - the long-running cooling of the labour market looks to have continued through September.

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What’s the latest in the UK?

Subdued rebound of UK GDP. Matching the consensus, UK GDP rose by 0.2% in August, following two prior months of stagnation. As the main contributor to this rebound, manufacturing output returned to growth, recording a 1.1% increase, fuelled by a resurgence in car production. Likewise, improved weather and correctional forces contributed towards a 0.4% gain in construction output, following contraction in July. Underwhelmingly, services output rose only 0.1%, hindered by a downturn in car sales and fall in healthcare. Looking ahead, the PMI points towards a brighter outlook as the recent erratic factors subside, and amidst a widely anticipated interest rate cut in November, a pickup in GDP is expected in September and beyond. Read more here.

Northern Ireland leads the pack in September’s Regional Growth Tracker. All but one of the UK’s nations and regions saw increased business activity last month with Northern Ireland seeing its strongest expansion since May. Wales recorded a very slight contraction preventing a second successive month of growth for all the UK. Employment saw a rise in just over half the nations and regions. Business confidence levels remain positive, particularly in the South East. New business growth continues to look positive, led by the South West. Overall, despite some regional challenges, the economic outlook remains optimistic. Read more here.

Labour market cooling trend continues. September’s KPMG-REC jobs report revealed a further decline in permanent placements, marking the second year of contraction, with the index edging up slightly to 44.9 but still in negative territory. Temporary billings also fell, as firms hesitated to commit to hiring. Recruitment agencies noted businesses' caution on recruitment due to uncertainty regarding future taxation and business policy. Despite difficulties finding suitable candidates, rising staff availability and lower demand have slowed salary growth to its weakest level since 2021. This trend could reinforce expectations for an interest rate cut in November. Read more here.

The latest credit conditions survey from the Bank of England largely supports the slow but steady improvement in the UK economy. Supply of secured (mortgage) credit increased in Q3 and lenders expect both demand and supply to grow in Q4. Unsecured credit is similar, if weaker. Availability rose slightly in Q3 but demand was flat and expected to fall in Q4. Firm size matters for corporate lending, with declines for smaller firms but increasingly positive for medium and larger firms. Defaults were broadly steady and margins widened in Q3, although are expected to narrow slightly in Q4. All in all an unremarkable, but broadly benign, picture of lending to the real economy. Read more here.

DMP survey shows inflation expectations are still sticky and BoE is unlikely to be in a rush to cut rates faster. Reported annualized output prices rose by 4.2% in the three-months to September, up 0.2% from the same measure in August. This is still expected to reduce to 3.6% in a year’s time, same as last month. Expectation for headline inflation one year ahead was at 2.6% in the 3 months to September. While the three-year ahead inflation expectation was also at 2.6%, well above the target rate. One-year ahead annual wage growth expectations remained unchanged at 4.1%. Employment growth slowed to 0.5%, consistent with a gradually loosening labour market. Overall uncertainty increased in September with 48% of firms reporting high levels of uncertainty – up from 45% in August, but monthly measures can be erratic, and the three-monthly measure shows a decline of 1ppts vs last month. Read more here.

UK house prices climbed for the third month in a row in September. The Halifax measure of house prices increased by 0.3% in September, bringing annual growth to 4.7%, the highest rate since November 2022. Mortgage affordability has been easing due to strong wage growth and falling interest rates. The RICS price balance rose to its highest in two years and the average interest rate on a 2-year fixed 75% LTV mortgage fell to 4.6% in September. New instructions to sell rose to +22 in September from +9 in August, reflecting fears of potential capital gains tax increases, but the sales-to-stock ratio on estate books was broadly unchanged in September, suggesting rising instructions have had little effect on the balance of demand and supply in the market. While buyer activity should continue to increase supported by anticipated further cuts to interest rates, housing costs remain a challenge for many. Read more here.

What’s the latest in the US?

The latest US inflation data won’t settle the debate. A measure of US inflation fell to 2.4% in September, from 2.5% previously. But like the UK, dig under the hood and there’s residual inflation heat on the services side. This month it was transportation services, specifically motor vehicle repair and car insurance (which has been a particularly stubborn inflation element of late!). Those who remain concerned about inflation will point to core inflation rising to 3.3% from 3.2% - an upside surprise to markets. And will buttress their argument by pointing to the Fed’s ‘supercore’ inflation gauge measuring 4% (well above target). The opposition will cite other measures showing sticky inflation elements in retreat while the ‘trimmed mean’ (which excludes the outliers) doing similar. How to reconcile these two views? Inflation’s in retreat, but it will be a bumpy path? Read more here.

The Fed is in no rush to lower rates. The Fed is cautious about cutting rates, despite a unanimous agreement to begin easing. While a substantial majority favoured a 50bp reduction, some members preferred a smaller 25bp cut, indicating unease about the larger move. The FOMC believes inflation is trending toward 2% and expects GDP to grow at trend rates, allowing for a gradual shift to a neutral policy stance. Markets anticipate an 80% chance of a 25bp cut in November. However, concerns linger that the Fed is too focused on recent economic strength and may not be adequately addressing potential future weaknesses, prompting the need for more urgency. Read more here.