Tempered Bets

The last mile in the inflation battle was always going to be hard. In the UK, the most recent data revealed a continued, albeit slow, decline in inflation. Meanwhile the latest three months of US price pressures surpassed expectations. In response to that, market pricing around rate cuts have been pushed back. However, other indicators point to disinflation: the labour market is loosening, supply chain disruptions and producer price pressures are easing.

Stuck in the middle. As Blackadder fretted, “we're in the stickiest situation since Sticky the stick insect got stuck on a sticky bun”. Inflation is gummy too, despite March’s CPI easing to 3.2% y/y, from 3.4% in February (‘core’ CPI was 4.2%, down from 4.5%). Most had hoped for more. The worry is services inflation is 6%. Restaurants and hotels had the biggest impact, but holidays also look like they’ll be pricy this year. And don’t look at insurance. While the economy is healing, it’s still fragile. It seems rate setters are stuck between a rock and a hard place.

Loosening. Staff demand is waning. That’s the message coming from the latest array of labour market data. Payroll employment fell slightly for the second month running, with 67,000 (0.2%) fewer people working in March than February. The claimant count rose a little too; now up 4% over the past year. So, February’s unemployment rate – estimated at 4.2% versus 3.9% in January – looks plausible despite ongoing concerns around its accuracy. So, conditions in the UK jobs market are loosening fractionally. Wages are still growing at a sky-high rate of 6% y/y, excluding bonuses, but that will surely decline further in coming months.

Bottoming out. The housing market was always going to be buffeted by rising interest rates, but it looks like the damage to house prices might end up being less than expected. The average interest rate on new mortgage lending shot up from 1.5% in November 2021 to 5.34% in November last year. But February’s data from the ONS shows that house prices might have stopped falling and are about 3% below the peak hit in the autumn of 2022. Rapid wage growth over that period has clearly helped blunt the impact in nominal terms, but those with long enough memories of previous housing cycles will be relieved that the spectre of negative equity is not widespread.

Tentative. Business conditions remain challenging but show tentative signs of improvement compared to January. A quarter of businesses experienced higher input costs but only 1-in-10 increased their prices. Labour costs remain one of the major reasons for higher costs, affecting 24% of businesses. 22% said that their turnover had decreased in March while 16% reported an increase. Only 6% of businesses experienced global supply chain disruption. Markets’ views on inflation have continued to gyrate in recent days and these survey results won’t help those looking for any definitive signal.

Upbeat without an uptick. March retail sales volumes stood pat, providing a disappointing end to Q1. Pockets of growth were seen in household goods stores and clothes shops, but these were offset by plunges in department stores and non-store sales categories. But fear not, retail sales volumes rebounded 1.9% in Q1 (much of this was driven by January’s surge while Feb-Mar saw weather disruptions to spending). Still, this will add 0.1pp to Q1 GDP growth. Looking ahead, strong real wage growth, and Chancellor’s tax cuts along with benefit increases will boost disposable income which should feed through to spending. Further, potential rate cuts, a housing market recovery and improved confidence levels further support this view.

Universal Credit.The Resolution Foundation released a report on the impact of Universal Credit’s (UC) gradual rollout, showing both winners and losers. UC has resulted in fiscal savings of around £5Bn annually compared to the legacy benefits system, but at a societal cost. Overall, 71% of the 9.8M families eligible for UC are worse off than under the legacy system - by an average of £350 per year. Working renters benefit most, gaining around £3,800 annually. However, disabled individuals, especially single people unable to work, lose around £2,800 annually. UC therefore focuses on 'making work pay' but also has reduced state protection for the most vulnerable in society.

Factory of the world. For over two decades, China’s remarkable economic performance has impressed the world. However, since 2019, China’s sluggish growth has led many to believe that the growth miracle of the world's second-largest economy has peaked. The latest output figures showed that GDP grew by 5.3% y/y in Q1, beating forecasts. The stronger than expected print was led by more buoyant industrial production and manufacturing investment. Nonetheless, domestic demand is weak, and the property slump continues. What’s more, other data paint a mixed picture, with growth in retail sales and industrial production for March missing expectations, while cement output slumped 22% in March, the largest monthly drop on record. 

Steady but slow is how the IMF described the global recovery in its recent economic forecast. The global economy proved resilient through 2022-23, defying stagflation fears. Growth prospects remain muted at 3.2% for 2024-25, weighed down by tight monetary policy, waning fiscal support and structural headwinds. Inflation is projected to moderate but remain elevated. Risks are balanced between potential price shocks reigniting inflation and central banks easing prematurely. UK growth is projected to rise from an estimated 0.1% in 2023 to 0.5% in 2024, as the lagged negative effects of high energy prices wane, then to 1.5% in 2025, as disinflation allows financial conditions to ease and real incomes to recover.