Pockets of resilience

The UK economy unexpectedly contracted in January, underscoring the challenge facing chancellor Rachel Reeves as she prepares to deliver the Spring Statement this month. Financial markets have been rattled by a flurry of tariff announcements and monetary policymakers on both sides of the Atlantic will be considering how to build that backdrop into their outlook with rate decisions from both the Bank of England and the Fed due this week. Certainly there are challenges to the outlook, but there are pockets of resilience, too. ?

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What’s the latest in the UK?

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GDP dips, but better days likely lie ahead. It was a disappointing start to the year as GDP fell 0.1% month-to-month, down from 0.4% growth in December and below the consensus of 0.1% growth. This downside surprise is mostly attributable to a 1.1% month-to-month contraction in manufacturing output, with construction output also declining 0.2%. Within the service sector the good news is that growth is pretty widespread, whether it’s in professional services or accommodation and food services. The bad news it’s very weak, with the sector as a whole managing growth of just 0.1%. ?Looking ahead, February’s PMI reading points to a slighter weaker, yet mixed outlook across the sectors. Furthermore, although Autumn Budget-related uncertainty appears to have largely subsided for now, escalating tariffs could put the UK at risk of near-term softness. Read more here.

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Short-term. The net balance of surveyors reporting that house prices have risen over the last three months fell to +11 in February from +21 in January and below the consensus, +20. Buyer demand fell to lowest level since November 2023 in February. Sales expectations over the coming three months also dropped to -5 in February, from +9 in January, while the new buyers’ enquiries balance also deteriorated to -14 in February, from -1. Further, RICS price balance saw a second consecutive drop and has now shed 14 points since December but is still consistent with year-over-year house price inflation of 4%. Read more here.

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Inflation expectations are rising amongst the public. Respondents to the latest Inflation Attitudes Survey - conducted by Ipsos on behalf of the Bank of England – see current inflation at 4.9% - 0.1% higher than in November - and expect it at 3.4% in the coming year – up 0.4% since November. Rising inflation expectations will cause concern for the Bank of England, but they could take some comfort that expectations on rate changes have also evolved. 5% fewer people expect rates to fall in the next 12-months, and 1% more expect them to rise suggesting that inflation anchoring and the public’s view of the Bank of England’s likely response to higher inflation still works as expected despite long-term inflation expectations also edging up by 0.2% in the latest survey. Read more here.

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Retail sales continue to see modest growth. Sales rose by 1.1% in February, matching February 2024 but underperforming the 3-month average of 2.4%. Food sales increased by 2.3%, slightly below January’s 2.8%, while non-food sales were flat, though online non-food purchases rose 1.9%. Consumers remain cautious, prioritising smaller purchases and experiences, with spending on larger items subdued. While strong real wage growth and falling shop prices offer some relief to consumers, retailers are concerned about rising business costs, including upcoming National Insurance hikes, which they argue could lead to higher prices and reduced investment. Read more here.

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Britain's economy is projected to expand by 0.3% in Q1 2025, according to the National Institute of Economic and Social Research. Mirroring the performance in January’s GDP, this modest growth is forecast to be primarily driven by the services sector, which is expected to grow by 0.5%. Technology services and firms focused on international expansion are flagged as pockets of resilience. But there are risks to the service sector growth engine, with NIESR flagging that it’s vulnerable to subdued demand and intensifying cost pressures. The outlook remains fragile, with manufacturing forecast to contract by 1.3% and construction by 0.1%. Mining and quarrying is projected to shrink by 2.4%. Read more here.

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Encouraging signs for an economy finding its feet. According to the latest ONS data for the week ending 23rd February, the typical seasonal bump in potential redundancies is easing. This aligns with both the latest labour market data and the KPMG REC Jobs report, which suggest improving conditions in the job market. Additionally, consumer spending shows positive trends, with Revolut data indicating spending in the first ten days of March is slightly above last year’s levels, a period of strong growth. These signals point towards gradual economic recovery, with good news expected in the month ahead as conditions continue to stabilize. Read more here.

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What’s the latest in the Global Economy?

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US inflation cools more than expected. February’s CPI estimates came in below expectations at 2.8%, below January’s 3.0%. Core CPI edged down 3.1% from 3.3%. The fall was driven by declining airline fares (-4.0%) and gasoline prices (-1.0%). Housing costs, which made up almost half the monthly increase, continued to rise but at a slower pace, with shelter up 0.3% on the month and 4.2% year-on-year—the smallest annual increase since December 2021. Food inflation increased 0.2%, as egg prices due to an avian flu outbreak, pushing annual inflation to 58.8%. Consumer prices have yet to show significant impacts from President Trump's initial 10% tariffs on Chinese goods, but with those tariffs recently doubled, the outlook for US inflation looks more uncertain than the data suggests. Read more here.

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U.S. weekly jobless claims data shows stability. Initial jobless claims fell to 220k, slightly below the previous figure of 222k. Continued claims dropped to 1.87 million, 27k lower than last week. On the surface, these figures do not suggest any significant deterioration in the labour market. This data doesn’t include federal employees, some of whom have lost their jobs on the back of efforts to reduce US government fiscal outlays (Department for Government Efficiency). But a separate datapoint shows that while applications filed by federal employees remained elevated for the second straight week, the numbers are very small at around 1.5k. Read more here.