As 2024 gets into full swing, the UK economy is plodding along in the right direction. And globally the outlook seems to be brightening. Meanwhile, markets are reading the runes of central bank communications. Though policymakers acknowledge rate cuts are coming, they remain wary. Fed Chair Powell took to the airwaves last night to convey his gospel of caution. Confidence and stability are the priorities that will shape thinking in months ahead.
Flat rate. Since Bank Rate reached 5.25% in August, the MPC have now held it constant for four consecutive meetings. But don’t mistake steadiness for inactivity. The Bank busily analyses data, refines guidance, and updates forecasts. Its latest outlook suggests that without any rate cuts inflation would fall well below target (to 1.4%) in two years’ time. That indicates cuts are coming, but traders are constantly reassessing their best guesses about the timing. Overall, last week’s ‘monetary event’ had little impact on expectations. All eyes are now on the March 6th ‘fiscal event’ because a pre-election tax cut could push monetary easing back.
Over the worst? No, not (just) January, but the slow erosion of bank deposits and associative decline in the money supply. Overall money deposits (M4ex) increased by £19.9bn, with households depositing a net £5.4bn in December. No wonder retail sales plummeted. While non-financial firms withdrew £1.2bn, all together it’s a sign of stabilisation. Lending remains weak though. Non-financial firms repaid a net £0.7bn, with continued deleveraging by Britain’s SMEs. And while mortgages balances fell, approvals rose, reaching 88.7k. Remortgaging was up 20%, enticed perhaps by the modest six basis point decline in new mortgage rates.
Uneven. The national employment rate in the 12 months to September 2023 was only 0.1 ppts shy of pre-pandemic levels. But the rebound was uneven. Low-employment areas like Tees Valley and Durham (+1.6 ppts) and West Central Scotland (+1.5 ppts) outpaced high employment areas like Cheshire (-2.2 ppts), Surrey and Sussex (-1.9 ppts) on post-covid job creation, narrowing the gap. However, on illness-related inactivity variation is increasing. Despite a mild national rise, areas with pre-existing health problems and fewer graduates, like Lincolnshire, saw sharp jumps. It’s unclear whether these geographic differences will endure. Nonetheless, boosting UK-wide labour market participation should remain a core policy priority.
Positive start. The adverse effect of higher rates was evident in the January round of the Decision Makers’ Panel survey. On average, firms reported sales being down 3.2% in Q3 last year due to higher rates, capital expenditures down 7.3% and employment 2.2% lower. And the drag continued in Q4, though softened a touch. But what is heartening to see is that the scale of decline has been lowered since these metrics were tracked in November. More importantly, firms reported in January a pick up in the expected year-ahead employment growth to 1.7%, 0.2 ppts higher than in the three months to December. The only worrying trend perhaps was the stickiness in expected wage growth for the year ahead, which remained unchanged at 5.2% on a three-month moving average basis.
Winter pressure. The increased cost of living in winter is exacerbated with the higher use of energy to keep warm and puts additional strain on the affordability of other basic needs. ONS survey data from October ’23 to January ’24 illustrates the extent of these pressures on households. 35% of those adults who are currently making rent or mortgage payments found it very or somewhat difficult to afford those payments. 39% of all adults reported difficulty affording their energy bills. 4% of adults reported that in the past two weeks they had run out of food and could not afford to buy more. The squeeze in household budgets has led to cutbacks on energy usage and on consumer spending more broadly.
Easing bias. Like the BoE, the Federal Reserve kept the funds rate unchanged at a 23-year high of 5.25%-5.5% for a fourth consecutive meeting in Jan-24. The FOMC noted that the risks to achieving its employment and inflation goals were moving into better balance (albeit with the uncertainty caveat). Any reference to further rate hikes was replaced by an easing bias, with Fed Chair Jay Powell noting it would be appropriate to begin reducing rates sometime this year. But not as early as the next meeting in March itself. Note, especially, the blowout January payrolls data.
Avoiding downturn. The Eurozone economy remained stagnant in the last quarter of 2023, after dipping by 0.1% in Q3. No “technical recession”, then. Over 2023, GDP rose by 0.5%, compared with 3.4% in 2022. Looking at the regional performance, Germany’s contraction was a significant drag on the bloc’s overall growth. France’s stalled growth was not helpful either. What’s more, inflation in January was higher than expected. It dipped to 2.8% from 2.9% in December, while core inflation fell to 3.3%, from 3.4%. The pain point, however, was services inflation, which was unchanged at 4.0%. In the meantime, Lagarde is arguing that “we are not there yet”, pushing back prospects of rate cuts before summer.
The clouds are parting… according to the IMF’s latest global economic outlook. And to make the point, it upgraded its outlook for global growth this year to 3.1%, 0.2 ppts higher than its last forecast in October. The US is now expected to slow only very modestly (from 2.5% growth in ’23 to 2.1% this year). By contrast the UK is expected to grow by a paltry 0.6% (a view unchanged from October). It views risks as balanced. On the upside, there could be quicker disinflation, and government efforts at reducing budget deficits might be delayed (it’s a big election year, after all) while AI could boost investment. On the downside, new commodity and supply disruptions could occur, as could persistent inflation and, related, slower growth from higher market interest rates.