Holding Steady

As the summer holidays approach (or are already in full swing in Scotland!), what would an end of year report card look like for the UK economy?? Bad start, strong second half would about sum it up. The run up to Christmas was weak but the economy got its head down in the New Year. GDP figures for May confirmed a 0.4% rise, twice the consensus level. It means the economy is 1.5% higher than at the start of the year. That’s “A” rating territory. Wholesale and retail trade rebounded strongly (with June data suggesting a bit of payback amid cooler weather) but growth was broad-based. And while the housing market experienced a pause in its recovery during the spring, indications are a rebound is on the way. Given that data backdrop, it’s no surprise that recent comments from two key Monetary Policy Committee members suggest they’re in no rush to raise rates.

?

Check out a glossary of key terms here.

?

What’s the latest in the UK?

?

Strong growth persisted across all major sectors. UK GDP surprised to the upside in May, rising 0.4% over the month, up from 0.0% in April. Services, particularly wholesale and retail trade, rebounded strongly (1.8%), supported by a surge in retail sales. Various service sub-sectors sustained the rise in their output levels from April. Manufacturing output also contributed, with notable gains in the food sector (1.7%), despite a decline in energy supply due to warmer weather. Construction surged 1.9% month-on-month, buoyed by favourable weather conditions. Lower energy costs and increased business spending further fuelled growth, dampening inflation and boosting consumers' real income. The strong momentum suggests continued economic resilience and potential for sustained expansion across sectors. Read more here.

?

Permanent job growth slows amidst the election cycle, but pay growth accelerates. The REC Jobs Report indicated a continued decline in permanent placements (index down to 45.5 in June from 48.2 in May), likely due to pre-election jitters. However, despite the decline, the permanent staff placements index still suggests a modest rise in employment compared to Q1 (averaging 46.7 in Q2 vs 43.4 in Q1). Recruitment difficulties persist, with a decrease in the availability of permanent staff (index down to 61.1 in June) and a rise in temporary billings as companies seek alternative staffing solutions. However, pay growth seems to be accelerating. The permanent staff salaries index reached its highest level since October 2023 (rising to 57.1 in June). This upward pressure on wages contradicts the Bank of England's view of subdued wage growth, potentially complicating their plans for a dovish policy. Read more here.

?

Weather continues to dampen consumer spending. UK retail sales fell 0.2% year-over-year in June 2024, impacted by cooler weather compared to last June's heatwave. Non-food sales dropped 2.9%, while food sales grew only 1.1%, both below last year's figures. Clothing and outdoor goods were particularly affected, though electronics and homewares saw growth. Retailers remain hopeful for a rebound with improved weather and rising real wages, supported by recent national insurance cuts, benefits uprating, and a 9.8% rise in the national living wage, which are all expected to boost disposable incomes and retail spending. Read more here.

?

Housing market recovery in the offing.? As with planting trees, the best time to buy a house may be thirty years ago: house prices have risen by 5.6% per year on average since 1994. But, is the second-best time to buy now? Perhaps. RICS’ surveyors painted a lacklustre picture of conditions in June. But for the first time in two years, a net balance of 5% now expect house prices to rise over the coming three months. A net 20% of surveyors expect sales volumes to increase too; the most upbeat since January 2022. Confidence in both is even greater over a 12-month horizon. Read more here.

?

Credit conditions survey shows a broadly stable picture. In the coming quarter, lenders expect house purchase lending demand to remain stable while remortgaging to pick up slightly.??The picture was mixed on unsecured and corporate credit. The supply of credit was expected to remain stable for corporates and unsecured but pick up slightly for mortgages. Margins on mortgage loans were reported to have increased in Q2 and were expected to marginally increase further in Q3. But with rate cuts just down the line, mortgage rates should inch down. Read more here.

?

No rush. Bank of England rate-setters avoid making speeches during election campaigns, to avoid accusations of interfering in politics. So now that the election is over expect a flurry of activity to analyse.? Huw Pill, the BoE's Chief Economist, is the latest to share his thinking and seems in no hurry to deviate from his vote to hold rates at 5.25%.? Pointing to modestly "upside" news on labour market tightness, pay growth and service price inflation, he hints that inflation is likely to be a little higher for longer than he previously thought. But the next two meetings will also see some personnel changes as two of the "no change" voters leave the committee. With the previous vote 7-2 in favour of 5.25% that squad rotation could have a decisive impact on the result. Read more here.

?

And ditto. Resonating the sentiments of fellow policy maker, Jonathan Haskel, too looked in no rush to vote for rate cuts. In his latest speech at the King’s College, London, he took an assessment of the progress made on the inflation front so far and what lies ahead. What’s the bottom line? While there are considerable encouraging signs, most notably from normalising inflation expectations and a return of headline inflation to target in May 2024, there remains key risks from the wage-price dynamics.? In particular, the playing out of recent ‘shocks’ to the wage price system in the UK alongside ‘tight and impaired labour market’ implies that inflation will remain ‘above target for quite some time’. Read more here.