When it’s cold and dark, we naturally look forward to the warmth and light of festivities ahead. For the UK economy, we can with reasonable confidence anticipate some future vantage point from which we will be able to look back on the difficult recent period of inflation and monetary tightening. The next official statistics on inflation will likely show gradual progress. Confidence about other outcomes, though, notably long-term productivity growth and global decarbonisation, can feel more like a leap of faith.
Disinflation on the horizon. The current inflation cycle has been heavily driven by supply disruptions. As those distortions fade, inflation should continue to come down. The latest data on business surveys seems to echo that expectation. In October, only 5% of UK businesses with 10 or more employees experienced global supply chain disruption. That’s the lowest proportion reported since the question was introduced in late December 2021. On the wages front, pay gains have probably peaked, with only 7% of businesses reporting that their employees’ hourly wages had increased in October compared with September (9%). Nonetheless, policymakers warn that the “last mile” of disinflation – getting back to the 2% target – will be the hardest.
Restrictive. Monetary policy famously operates with lags, forcing MPC members to set interest rates based on a highly uncertain outlook. Despite weak on-the-ground activity, Megan Greene, a new MPC member, characterises today’s main risk as inflation persistence: ongoing high services inflation and wage growth. Future rates depend on the ‘medium-term equilibrium unemployment rate’ (u*) and interest rate (r*). Neither is observable… But models and markets alike imply r* has risen amidst higher investment and debt issuance. Estimates of u* have jumped 0.5ppts since the pandemic too – jobseekers and openings poorly matched and stronger wage-bargaining perhaps. That could mean the labour market, and monetary policy, stay tight even as unemployment rises.
Heating up. A common complaint against economy-wide statistics like inflation is that people often don’t feel it adequately reflects their experience, that’s especially so for the housing market where the rent increases of 10%+ stick in people’s memory. Last week the ONS announced a range of updates to its rental series index that will go some way to closing that gap. Early estimates of the changes suggest that rental price growth in the UK is now running at 8.4%, a big jump up from the already elevated previous estimate of 6.1%. There are geographic differences too, with London showing growth of 10% and Scotland up by 11.5%. These rises won’t make higher rental bills any easier to deal with, but at least policymakers now have a better handle on the pressures people are under.
Careful now. In recent years, money has been flowing around in unfamiliar ways. Pandemic ‘excess’ savings have interacted with inflation and rising interest rates, influencing day-to-day decisions about spending, saving and borrowing. The latest BoE data shows that savers have shifted more than £100bn into fixed savings accounts since rate hikes began in late 2021 and that the rates on this kind of deposit are now higher than mortgage rates. In October, overall household deposits increased by £6.8bn (well above the pre-Covid norm). How cautious we remain in months ahead will play a significant role in how the economy develops.
Christmas demand. Black Friday deals and the run-up to Christmas boost consumer spending, increasing demand pressures for firms. A small number of firms however are struggling to deliver on Christmas wishes. 1 in 10 report experiencing worker shortages, with 44% of these firms unable to meet demand. Hiring activity remains weak, with vacancies continuing to trend downwards on a week-by-week and yearly basis. Compared to last year, redundancies trended higher (up 50%), along with proposed redundances, which are creeping upwards too (up 25%). Skilled workers will be top of most businesses’ Christmas wish lists this year.
Stable but low. That’s how the OECD characterised UK growth in the recent economic outlook. GDP growth is forecast to pick up from 0.5% in 2023 to 0.7% in 2024 and 1.2% in 2025. Private expenditure is expected to replace government consumption and investment as the main driver of growth, helped by easing price pressures. Globally, although inflation is easing, monetary tightening is slowing growth. Emerging markets fare better than advanced economies, with Europe lagging behind the US. A soft landing for developed countries is projected but not guaranteed. Global trade slows due to cyclical and structural factors. With mounting fiscal pressures from rising interest costs and slow growth, governments need bold reforms and policies supporting productivity, human capital and green investment.
Almost there. Disinflation in theEurozone continued with the headline measure falling to 2.4% in November from 2.9% in October and below consensus of 2.7%. More encouragingly, core inflation at 3.6% and services inflation at 4% fell sharply too. Policymakers had adopted a markedly hawkish tone across the key economies in recent days. The road to meeting the inflation target will still be bumpy. But this reading will go a long way in assuaging those concerned about the upside inflation risk. Given the additional backdrop of a weak economic outlook, it won’t be a surprise if the ECB soon pivots into an easing cycle.
Stark math. COP 28 got underway in Dubai with the biggest ever attendance. And as Tina Stege, the climate envoy for the Marshall Islands, reminded stakeholders, the 1.5C target should be the “north star” of the summit’s outcome. That’s looking increasingly difficult. A new report by climate researchers stated that the planet is warming so fast, that overshooting it is almost inevitable, absent radical transformation. According to Bill Gates keeping warming even to 2C “isn’t that likely”. So the highest aspirations can’t be met, but what can be done? Methane is a good place to start, given its potency. 50 oil and gas producers, while not agreeing to cut oil and gas production, agreed a pact to cut methane production to near zero by 2030 and stop routine flaring of gas. And there’s a growing consensus that the voluntary carbon offset market is due an overhaul (it’s been beset by a string of scandals of late). Let’s see what the full summit brings.