The UK economy ended the first half of the year on a positive note, performing better than expected. Consumer spending and business investment picked up in the second quarter and firms were resilient to industrial action. Whether this will be the start of a steady recovery, or if the cheer will prove short lived, as higher rates bite, remains to be seen.

Recession dodger. The expected flatling in UK GDP failed to materialise in the second quarter. Instead, the pace of economic growth doubled from 0.1% q/q in the first quarter to 0.2% q/q in the three months to June. Granted that’s still a rather pedestrian rate of expansion but it’s the strongest reading in five quarters. Despite inflationary headwinds, consumer spending posted a surprisingly strong 0.7% q/q rise. Meanwhile the warm weather and extra June Bank Holiday were undoubtedly factors in the 0.5% m/m rebound in monthly GDP between May and June. Unlike its peers, the UK economy still hasn’t returned to its pre-Covid size and remains 0.2% below Q4-2019 levels. Dodging a recession is one thing but dodging stagnation is quite another.

Not so rosy. Business confidence slipped substantially last month across the UK, with sentiment particularly weak in the North East and Northern Ireland. Roughly half the UK’s regions were still showing signs of growth however, led by London, the North West and Yorkshire. Despite the slide in growth expectations businesses aren’t looking to reduce staffing levels yet. Employers reported lower demand for workers but still expected to be employing more people in future, suggesting only a modest weakening of the labour market from its recent red-hot status.

Hiring hiatus. Firms continue to display preference for flexible staffing arrangements amid the subdued economic outlook. And a drop in client confidence is causing greater hesitancy to commit to new hires. The KPMG REC report on UK Jobs showed that permanent staff placements fell by 4 points to 42.4 in July – the steepest pace of decline since June’20. Although temporary placements continue to rise, the pace has softened materially. The slowdown in hiring, company redundancies and restructuring plans are pushing up staff availability. All signs point to greater slack in this week’s labour market data.

Robust in real-time. Consumer behaviour indicators showed increased activity in the week ending 10th August, with Revolut debit card spending rising, alongside an increase of 5 ppts in the aggregate CHAPS-based indicator of credit and debit card purchases – suggesting consumer resilience in the face of rate rises. Both the System Price of electricity and System Average Price of gas saw decreases when compared with the previous week, falling by 9% and 2%, respectively. Meanwhile, businesses have reason to be more confident: fewer than 1 in 10 (9%) businesses were affected by industrial action in June; while only 7% of businesses with 10 or more employees experienced global supply chain disruption, down 3 ppts from May.

Biting prices. High food prices are set to stay on the menu until the end of 2023, with food inflation projected to remain higher than overall inflation at about 10%. Even though pressures have been easing, food producers and retailers say that they’re still facing higher input prices. This is partially due to long-term contracts negotiated during commodity price peaks, but also continued energy and wage pressures. Staples such as eggs and milk should see some price reductions. But with no overall “transformation” of food prices before 2024, the BoE chief economist, Huw Pill, says high supermarket bills will have a lasting aftertaste.

The “D” Word. China dipped into deflation, for the first time since February 2021. Chinese CPI fell in annual terms by 0.3% y/y in July. What’s more, the Producer Price Index (PPI) declined for a tenth consecutive month – down 4.4% in July. The key factors that have hurt Chinese economic momentum include faltering domestic spending, persistently weak global demand, an ongoing property sector slowdown, and weakness in trade. In response, the Chinese central bank may cut interest rates further this year. But with the government holding a target average inflation rate of 3% this year, the clamour for more direct policy stimulus is not going away.

Ok, bro.  At first glance, a slight rise in US Consumer Price Inflation – to 3.2% in the year to July – might not seem like good news. But things look better up close. Core inflation rose just 0.2% m/m, for the second month running, and price pressures across many areas are stable or cooling. Goods prices, excluding autos, actually declined last month (-0.2%); perhaps the start of a trend. Auto prices also fell (-1.3%). Rental inflation is broadly stable. Other services prices, e.g., airfares, aren’t yet easing but the overall set of figures are compatible with the Fed holding rates in September. Time to chillax?