Having gotten used to difficult economic news in recent years, and against a backdrop of prolonged productivity stagnation, indicators of recovery will not necessarily generate an upbeat mood. Energy bills coming down and private sector activity expanding should help, but only gradually. Rather than celebration, there is a sense of waiting: for inflation to return to target and interest rates to come down, for the March Budget and – at some point – a General Election. Yet the macro data could throw up plenty of surprises along the way.
Optimism. The UK dipped into a technical recession at the end of 2023, but PMI surveys suggest that the economy has already rebounded. The S&P composite PMI increased to 53.3 in February, from 52.9 in January. That’s the fourth consecutive month in growth territory, and the highest level since May 2023. The rise was driven by services, with firms reporting higher demand, whereas manufacturing declined for the twelfth month in a row (although the rate of decline eased). However, the GfK consumer confidence index fell from -19 to -21 in February (though mostly due to seasonal factors). Overall, the outlook is uncertain, but rising real incomes and expected interest rate cuts are reasons to be optimistic.
Energy transition. UK household incomes are in repair mode, with wages outpacing inflation since last summer. But there’s work to do to reverse all the damage from the cost-of-living squeeze. Encouraging then that Ofgem announced that the energy price cap will fall by £238 to £1,690 in April, from £1,928 in the current quarter, a drop of 12%. And there looks to be more on the way. The energy consultants Cornwall Insight forecast the cap to fall again in July, to £1,462, before ticking up to £1,521 in October. Another mild winter across Europe has helped. But strongly expanding global supply is an emerging story: there’s a wave of global LNG capacity on the way in the coming years.
On the cusp. The Bank of England sees “encouraging signs” that inflationary pressures are easing in Britain. Governor Andrew Bailey told the Treasury committee that inflation has “come down very rapidly” and the technical recession entered last year is likely to be small. He said interest rate cuts could come before inflation reaches the 2% target, declining to specify timing. Markets are now pricing in at least three cuts this year. The cautious optimism comes even as the BoE’s deputy governor asserts services inflation and pay growth remain too high. Overall, the bank believes monetary policy credibility means this surge will pass faster than the one after the 1970s energy price shock.
Clouds persist. The latest ONS summary of real-time indicators gives further assorted hints on the state of the economy. One key takeaway is that the labour market, unlike the climate, is cooling. Job advertisements are on the decline, dipping 3% week-on-week and 15% compared to last year. And proposed redundancies have soared 36% above the level in the same week of 2023. Meanwhile, the February half-term break offered a boost to consumer activity, with retail footfall up 13% on the prior week. Less happily, HMRC figures indicate that slightly more firms registered decreasing turnover in January than increasing.
Business expectations. And yet, according to the fortnightly ONS Business Insights survey, turnover expectations for the months ahead are pretty optimistic, with 76% of respondents believing their turnover will either rise or stay the same. Falling demand for goods and services are a concern for just a fifth of respondents. Meanwhile, nearly half of firms surveyed (48%) do not expect to raise prices in March, which is reassuring for the pathway of inflation and interest rates. It’s also good news that only 6% of businesses with ten or more employees reported exposure to global supply chain disruption in January.
Fiscal space race. The 6th of March Budget looms large over lots of economic statistics at the moment, none more so than the public finance data. January’s budget surplus was a bit smaller than hoped as a traditionally strong month for tax receipts wasn’t as lucrative as forecast. But overall, the Government has still borrowed about £11bn less this tax year than it planned to, even as recently as November’s Autumn Statement. Does that mean there’s an extra £11bn to spend? Not necessarily, given how the current fiscal rules operate. The biggest swing factor there is forecast changes in tax and spend much further into the future. Whilst most analysts expect there’ll be some fiscal space for giveaways, the budget probably won’t be as big as some of its predecessors.
Trading up. The legacy of the 2000s ‘China shock’, when manufacturing competition restructured many economies, is evident in US politics. A new Resolution Foundation report, Decent Exposure, tackles the theme of trade shocks in the UK context. Between 2000 and 2009, the share of workers in manufacturing fell from 18% to 11%. And today we are even more open to international trade than we were twenty years ago, despite Brexit raising trade barriers. Our successes in exporting services generate exposure to potential future shocks in sectors like education and finance. These could be different, distributionally and politically, to manufacturing shocks of the past.
Oceans apart. Eurozone PMIs for February showed continued price increases, decent hiring intentions and signs the economy is so far weathering interest rate hikes well. The composite PMI rose for a fourth straight month, to a nine-month high of 52.3, up from 50.3 in Jan, and above the consensus 50.6. This will bolster ECB hawks’ calls for the ECB to continue its steep tightening path. Across the Atlantic, business activity cooled in the US, as composite PMI fell to 51.4 from 52.0. But this sustained growth was accompanied by subdued price pressures. Encouragingly, input cost growth was at the lowest since October 2020, allaying fears that price pressures are picking up.