Hopeful Steps

This week’s economic tea leaves paint a mixed picture for UK households. While there were signs of robustness and renewed confidence with record-breaking deposits and a pick-up in mortgage approvals, the cost of living remains a lingering concern. Inflation and mortgage rates may be cooling but mortgage payments are still keeping the heat on household budgets. Spending may also be taking a dip thanks to direct debit hikes. In the Eurozone, rate cuts are expected to get underway this week.

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What’s the latest in the UK?

Households hold the cash, while firms repay debt. Here’s a lesser-known fact, until 1752 the New Year started on the 25 March. Hence our fiscal year. This also means April is boom time for ISAs and, this year, households deposited a record breaking ￡11.7bn. Overall deposits rose by ￡10.3bn, marking a big shift from last year’s falls. Mortgage lending increased a net ￡2.4bn (￡0.5bn in March) the first annualised growth since 2022. Pipeline looks stable too, as home purchase mortgages were effectively unchanged (c.61,000). However, businesses continue to shun debt, with private firms, both large and small, repaying ?a combined ￡1.1bn net in April. Read more here.

Shop price inflation falls to lowest level since 2021. Shop price inflation fell to a mere 0.6% in May, the lowest level since November 2021 (down from April's 0.8%). Non-food prices saw deflation deepen to -0.8%, likely due to reduced demand for larger purchases. Food inflation slowed to 3.2%, its lowest point since February 2022, with fresh food inflation dropping to 2.0%. While food prices stabilised, unseasonable weather dampened sales. So while services inflation remains problematic, households and policy-makers can take solace from the unambiguous signs around shop price inflation: pressures are subdued. Read more here.?

Rising mortgage payments take the shine off living cost improvements.?Declining inflationary pressures aren't necessarily reflected in real-world experiences. New figures show that overall household costs rose 4.4% in the year to March; 1.2ppts faster than CPI inflation. Higher mortgage costs, excluded from CPI calculations, are driving the difference: mortgagors’ inflation is still running at 5.5% versus just 3.3%?for outright homeowners. As a result, high income households are currently experiencing more rapid cost pressures (5.0%) than low-income households (3.9%). That reverses the earlier situation, leaving both groups seeing similarly stark (28%+) cost rises over a five-year period. Read more?here.

Households are experiencing higher expenses and on average spending less. Monthly ONS data reveals a trend of rising average direct debit costs, likely contributing to decreased credit and debit card spending. In April, average monthly direct debits increased due to higher costs for personal debt, gym memberships, and water utilities. However, energy direct debits fell by 1% from March 2024 and were 13% lower than April 2023, following Ofgem's energy price cap reduction. These rising costs have contributed to an 8% decline in UK credit and debit card spending since April 2023, indicating higher regular expenses are prompting consumers to cut back on spending. Read more here.

?Home ownership rates for young adults may be inching higher, but it’s a partial recovery at best. Home ownership for young adults has recovered?back?to its 2010 level (39%) after falling continuously from 2000 through to 2015?when it reached a mere 33%, according to the Institute for Fiscal Studies. This recovery, primarily observed among middle-income earners, is potentially linked to the accelerated growth in disposable incomes of young adults since 2015. But there’s a lot of ground to make up. Home ownership rates for 25- to 34-year-olds is still?a third?lower than in 2000 when it stood at 59%, amidst a wider trend of younger cohorts exhibiting lower levels of ownership for their age. And this disparity is now leading to a fewer number of older adults who own homes as they approach retirement. Read more here.

?How do you solve a problem like carbon emissions? ?Well pricing carbon is a good place to start. Pity then the World Bank’s overview of carbon pricing instruments around the world reveals limited progress over the past year, but at least there were some promising pockets. Carbon pricing and emissions trading systems (ETS) now cover 24% of global emissions, up from 7% around two decades ago. A look back on 2023 reveals that, on the plus side, carbon tax rates showed slight increases and large emerging economies, including India and Brazil, made progress towards carbon pricing. But a number of ETSs showed price declines and overall carbon price levels were short of levels to reach the Paris Agreement goals. Read more here.

?What’s the latest in the Eurozone?

Rising Eurozone inflation and strong labour market challenge ECB's planned rate cut path. Eurozone inflation unexpectedly ticked up in May, reaching 2.6% (from 2.4%) as core prices accelerated to 2.9% (from 2.7%). Stubbornly high services inflation rose to a seven-month high of 4.1%, up from 3.7% a month earlier. In addition, in April the single currency bloc recorded the lowest unemployment reading since its formation (6.4%) and the economy returned to growth in Q1. The ECB faces a tricky balancing at this week’s meeting, between lowering borrowing costs and ensuring price stability. A cut is pretty much certain according to market pricing. What’s less certain is the pace of cuts thereafter. Read more here.

?What’s the latest in Asia?

China’s manufacturing activities flounder in May. The official PMI slipped into contraction (49.5 from April’s 50.4) while the Caixin PMI rose 0.3 points to 51.7. This suggests improvements in sectors that the Caixin index is weighted towards vis-à-vis the official index—light industries, the private sector and export-facing firms. The mixed picture reflects China’s uneven recovery. The property sector is still struggling, but some investment boost in construction will come from the government’s bond issuance over the last month. Indications of rising consumer goods output in the Caixin PMI suggest that businesses expect stronger spending, probably due to consumer goods trade-in incentives being rolled out across the country.? Read more here.

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