Picking up momentum?
The UK economy unexpectedly grew in the fourth quarter, a welcome upside surprise. But it was left struggling for momentum amid weak investment and consumer spending. This is showing up in reduced demand for labour, a story playing out in the euro area as well. To add to concerns, inflationary pressures are resurfacing, both in the UK and the US, all together making for a complex mix for a central banker to navigate through.
Check out a glossary of key terms here.
What’s the latest in the UK?
The UK economy makes a modest recovery. December saw stronger than expected 0.4% growth in monthly GDP, marking a welcome improvement from November’s 0.1% increase. This growth was mainly driven by the services sector which saw 0.4% growth on the month and 0.2% growth on the quarter. However, the quarterly pace is far too slow at 0.1%, with businesses trimming investment 3.2% on the quarter. More worryingly, UK living standards, as measured by GDP per capita, fell by 0.1% over Q4, and have now fallen for two years running! Not surprisingly, consumer spending remained flat over the quarter. Overall, there is need for more evidence to see if the turnaround will last. Read more here and here.
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Hiring activity stutters amidst subdued staff demand. Rather than a fresh start, January brought further weak hiring according to KPMG/REC. The staff placement index hovers close to an 18-month low, of just 39.8; nearly 15pts shy of its late-2010s average. This survey has proved overly pessimistic of late but there’s little doubt that business continue to reconsider staffing plans. The vacancy index shed another 1pt, to a post-covid low of 41.6, with recruiters reporting widespread declines in openings across industries. Will lacklustre jobs growth feed-through to more moderate wage rises? Apparently so: the permanent salaries index dipped further below normal to 52.6. Read more here.
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Rising costs hit the regions. The latest NatWest / S&P Regional Growth Tracker reports that only 4 of the 12 UK regions saw activity growth in January, up from 3 in December. Mirroring last month, London and the North East reported the most encouraging growth, with London also the frontrunner in relation to future expectations. The main story, however, is that firms across all regions are reporting rising input cost inflation, as well as mounting output price pressures. In particular, input costs in East England rose most significantly, while the North East escaped as the only region to report a slower rise in output prices than in December. Meanwhile, employment activity varied, with half of the regions reporting employment growth. Read more here.
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Stable home sales ahead. The RICS headline house price balance fell in January to +22 from +26 in December, below the consensus expectations of +28. However, the housing market continues to demonstrate resilience to higher interest rates and market volatility. Sales expectations over the next three months fell to +10 in January from +16 in December and the new buyer enquiries balance dropped to 0, from +4 in December. All said, the outlook for home sales is still positive, with a net balance of 30% of estate agents expecting an increase in sales in the year ahead. Read more here.
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Governor of the Bank of England warns that dramatic shifts in financial markets are being underestimated. Non-bank financial institutions now control nearly half of global financial assets, introducing new vulnerabilities through multi-manager hedge funds, systematic trading strategies, and non-bank market makers. While these changes bring benefits, they risk amplifying market shocks and creating systemic risks. The Bank has responded with two innovations: a System-Wide Exploratory Scenario stress test and a new contingent liquidity facility for non-banks. Governor Bailey argues there's no trade-off between growth and financial stability, but regulation must evolve thoughtfully with the market. Read more here.
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‘Activist’ policymaker looks to cut through the noise.?To the surprise of many, MPC member Catherine Mann voted for a 0.5% reduction to Bank rate in the latest MPC decision, which was the first time she voted for a cut this cycle. In her recent speech she expressed concerns about continued weak demand and fears of knock-on impacts on the labour market as the main reason for preferring “bolder action and more explicit communication”. She also warned not to be dismayed by the hump in inflation in the new forecast, as most of the increase is not related to domestically generated price pressures, and soft consumption will limit firms pricing power preventing second-round inflationary effects. Does this all mean we have a new dove on the MPC? Not quite! She reiterated her preference for continued restrictive policy in the future to anchor expectations and sees the equilibrium rate towards the higher end of forecasts. Read more here.
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What’s the latest in the Global Economy?
?Feeling hot hot hot. US monthly CPI rose by 0.5% vs consensus of 0.3%. It was the fastest pace since August 2023 and brought annual inflation to 3%. Core inflation rose by 0.4%, pushing the yearly rate to 3.3%. Shelter costs were a key driver, up 0.4% over the month, contributing to nearly 30% of the total rise. Food prices jumped 0.4%, while energy prices climbed 1.1%, driven by a 1.8% spike in gasoline costs.? With inflation staying stubbornly high, uncertainty grows over the Federal Reserve’s rate cut plans, especially in the backdrop of President Trump’s tariffs and economic policies. Read more here.
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Euro Area growth is up, but barely.?Much like, indeed matching, the UK, mainland Europe started 2024 well enough but struggled to finish the race with any pace – growing just 0.1% in the final quarter. In the end the euro area grew by 0.7% or thereabouts in 2024 (it’s a ‘flash’ estimate). Again, close to the UK’s 0.9%. So, we both have technical growth, just not a lot. And for context,?the US grew by 0.6% in Q4 and 2.8% over the year. Oh, and for completeness, employment in the euro area also increased by 0.1% in Q4. For more read here.