Finding the right policy

The UK housing market showed resilience in the face of affordability pressures as buyers tried to get ahead of stamp duty changes taking effect in April. Meanwhile, the Bank of England’s assessment of the state of the labour market has become more difficult owing to more volatile data. But it’s critical to setting policy. And it’s not the only thing focusing the minds of policymakers at Threadneedle Street with trade fragmentation also having monetary policy implications. While over in the US, some concerns around the economic outlook are starting to appear, although the biggest drop in US consumer spending in almost four years likely overstates things. And can Germany’s new government mobilise the fiscal resources to resurrect its stagnant economy? ?

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Check out a glossary of key terms here.

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What’s the latest in the UK?

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The property market remains strong, but a little near-term softening wouldn’t be surprising. The Nationwide UK House Price Index (HPI) rose by 0.4% month-to-month in February, from 0.1% in January and outperforming the consensus of 0.2%. Rising above the 2022 peak, this strength reflects property market resilience amidst elevated uncertainty and high rates, with the year-on-year slowdown (3.9% vs 4.1%) distorted by an exceptionally significant gain last January. Looking ahead, the imminent discontinuation of stamp duty threshold relief has likely boosted activity of late, making a slowdown plausible. Reinforcing this, the RICS survey suggests mortgage approvals will likely jump, before falling after April, but that house price inflation will probably remain at healthy levels. Read more here.

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Deep uncertainty surrounds the monetary policy outlook. BoE Deputy Governor, Dave Ramsden highlighted growing problems policymakers face extracting the signal from the noise when it comes to the UK’s increasingly volatile labour market data. Combining multiple sources into models can help. These suggest pay growth remains stubbornly high, but that the economy is no longer creating jobs and spare capacity is beginning to emerge. There’s a lot riding on that assessment. With CPI inflation expected to hit 3.7% later this year, the MPC’s base case relies on the labour market being loose enough to keep a lid on second-round effects – enabling them to ignore, err, ‘transitory’ pressures. The upshot: gradual rate cuts may be the most likely scenario, but don’t rule out a major deviation. Read more here.

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Does global trade fragmentation matter for monetary policy and the UK economy? It matters a great deal, as energy and other imports make up about 40% of the UK consumption basket, and global economic fluctuations drove as much as 50% of the variance in UK GDP growth in the past 15-years, highlighted Swati Dhingra - a member of the monetary policy committee - in a recent lecture. How should the MPC respond to increased trade fragmentation from tariffs? It depends. If it happens in an orderly way with systemic reconfiguration of trade relationships, then inflationary pressures would remain relatively contained beyond one-off price adjustments. While a disorderly fragmentation could bring sectoral vulnerabilities to the fore and increase volatility and price pressures. Tricky territory for policymakers. Read more here.

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The Climate Change Committee has recommended a 7th Carbon Budget (2038-2042) targeting 87% emissions reduction from 1990 levels. While the UK has already halved emissions and overachieved decarbonisation relative to the first three carbon budgets, meeting future targets requires significant transformation. Decarbonising electricity, electrifying transport, and buildings, and developing carbon removal will form the backbone of this transition. Required additional investments peak at ￡46 billion annually this decade, but operating savings eventually outweigh costs, with total transition expenses estimated at just 0.2% of projected GDP. CCC expects that most funding will come from the private sector, with public spending never exceeding 2% of total government expenditure. Read more here.

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Nearly 1 million young people in the UK are NEET—Not in Education, Employment, or Training. It is estimated that as of late 2024, 13.4% of 16-24-year-olds are NEET, marking a 1.3pp increase from the previous year. 595,000 young people are also categorised as economically inactive, not seeking work or training. Unemployment is also a concern, with 392,000 young people actively seeking jobs but still NEET. Whilst the exact numbers are uncertain due to ongoing volatility associated with the Labour Force Survey, they highlight a growing challenge for youth engagement, with more support needed to reverse the trend. Read more here.

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What’s the latest in the Global Economy?

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Consumers are tightening their purses in the US. A modicum of concern around the outlook for the seemingly ever-mighty US economy over the past week or so. The latest data point to raise eyebrows was consumer spending, which dropped by 0.5% month-over-month in real terms in January, a bigger fall than expected. This was despite a bumper 0.6% increase in the real personal income. The bad weather probably contributed to an elevated savings ratio and credit growth remains healthy. And the inflation gauge offered some good news with the core price index rising 2.6%y/y. But consumer sentiment has recently soured. Couple that with rising business uncertainty and the outlook has become that big muddier, compared to the buoyant aftermath of the US election. Read more here.

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Germany is poised for a new coalition government, with Friedrich Merz’s conservative CDU/CSU bloc expected to replace the incumbent SPD-led government. This shift is in the backdrop of ongoing economic stagnation in Germany. A central promise of Merz’s bloc is reforming Germany’s restrictive fiscal policies, particularly the ‘debt brake’ – a constitutional rule that limits government borrowing. This reform aims to boost public investment and address external pressures, such as rising defence spending. Given that Germany is the UK’s second-largest export market, the success of these reforms will significantly influence the UK, particularly if Germany’s stagnation continues to undermine trade and growth. Read more here and here.

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China's factory activity is bottoming out, driven by stronger supply and demand, including a rebound in export orders. While official manufacturing PMI rose to 50.2 in February from 49.1 in January and consensus, 49.9, the Caixin manufacturing PMI rose to 50.8 in February from 50.1 in January. The Caixin index concurred with the official gauge in showing a month-to-month activity improvement in February, as factories reopened, and workers returned following the Lunar New Year holiday. The employment index, however, remained below 50, at 49.1 in February, recovering from the January holiday low, 46.2, but only to a similar level as December. Read more here