Relief in Parts

This week's economic news is like an espresso: a pick-me-up shot of relief for UK consumers welcoming falling prices and surging deposits, but with a bitter aftertaste for businesses facing post-Brexit export challenges and tight liquidity. The Eurozone and China’s economies have perked up, yet a cautious US Fed continues to hold rates firm. Is the economic cup already half full, or are we waiting for the real strong stuff to come??

Good tidings. UK household deposits defied expectations in Q1. Deposits surged, driven by real income gains, a robust labour market, and fading economic uncertainty. This marks a sharp contrast to the recent decline in corporate deposits, which remained broadly stable. Meanwhile, borrowing is back in vogue. Households snapped up lower mortgage rates, with net mortgage approvals rising to their highest level in 18 months (61.3k in March vs 60.5k in February). Businesses too are splashing out, with capital market issuance, led by bonds, hitting a two-year high. Bank borrowing also rose sharply, led by securities, suggesting a revitalised appetite for investment. Overall, a positive picture on all fronts!?

Price pressures plunge. UK shoppers finally catch a break as growth in shop prices slowed to a slushy 0.8% in April, the lowest since December 2021, according to the British Retail Consortium Shop Price Index. Non-food items are the stars of the show, experiencing deflation for the first time in over two years, with prices falling a cool -0.6% YoY, thanks to retailers slashing summer stock due to the wet weather. Even food inflation is chilling, with fresh food prices slowing to 2.4%, their weakest pace since November 2021. While this cooldown offers some respite after the cost-of-living squeeze, will it be enough for the Bank of England to cut rates at this week’s MPC meeting?

Exports and regulations. The latest ONS survey reveals a bumpy road for British exporters. Manufacturers are feeling the pinch of post-Brexit regulations. A significant 60% of goods exporters reported rising export costs, likely due to new administrative hurdles and compliance requirements. This impact is shared by water and waste (67%) and wholesale/retail (52%) sectors. However, the UK’s dominant services sector seems to be navigating these changes more smoothly, with most businesses reporting no significant cost increases tied to regulations. This uneven impact suggests Brexit’s burden may vary considerably by industry, potentially complicating the government’s goal of a globally competitive Britain.

Caution. ONS near-time data shows credit and debit card spending dipped slightly by 1% compared to the previous week and remains 8% below April 2023. Therefore, there may be potential softening of consumer demand. The job market is mirroring this worry with online adverts falling slightly week-on-week, albeit marginally, and a worrying 20% drop year-on-year. This highlights a potential slowdown in business activity. For March 2024, the year-on-year growth rate for sales in small businesses was -4% and down 11% compared to last year, perhaps a potential sign of a slight slowdown in the UK economy.?

Recovery. According to the latest OECD Economic Outlook, the global economy is brightening, with growth projected at 3.1% in 2024 and 3.2% in 2025. Inflation is falling faster than expected, though risks remain from geopolitical tensions and potential financial vulnerabilities. Monetary policy must stay restrictive to quash inflation, while governments are pincered between rising debt and spending pressures. UK GDP growth is projected to remain sluggish at 0.4% in 2024 before improving to 1.0% in 2025. And while UK inflation is expected to continue moderating, persistent services price pressures will keep core inflation elevated at 3.3% in 2024 and 2.5% in 2025.

Back in the game.? Eurozone GDP grew an estimated 0.3% in the first quarter, ending a run of poor performance (GDP fell 0.1% in both Q3 and Q4 2023). And while growth was widespread, the smaller, peripheral, economies did best. A decent PMI score of 51.4 in April signals more of the same for Q2. So goodbye shallow recession, hello rebound. The bounce is stronger than the European Central Bank had expected but with inflation low(ish) and stable, at 2.4% in April, a June rate cut remains on the cards. Core inflation fell 0.2ppts to 2.7% last month. Even services inflation is easing, down -0.3ppts to 3.7%. Game on.?

Unwavering. Inflation’s grip and a tight labour market led the Fed to hold rates at its May 2nd meeting. Despite recent upside inflation surprises, the Committee reassured markets, stating risks to their goals have “moved towards better balance”. Fed Chair Jay Powell echoed this, suggesting current policy may be enough to tame inflation to reach the 2% target. While markets expect one rate cut this year, the Fed’s statement leaves room for more if payroll growth weakens significantly and core inflation returns to 2023’s lower levels. The Fed may be steady now, but a data-driven pivot to cuts remains on the table.

Healthy. China’s factory sector is showing signs of life by expanding for a second month in a row. The Caixin PMI, focused on light industry and private firms, rose to a 14-month high of 51.4 in April, buoyed by a surge in overseas demand. This surpasses the official PMI (50.4), which suggests a slight moderation from March (50.8). While tech and auto sectors remain bright spots year-on-year, the non-manufacturing PMI dipped to a 3-month low (51.2) in April, reflecting sluggish consumer activity. Overall, China’s industrial sector appears to be stabilising, but a wait-and-see approach is prudent given the persistent drag from subdued consumer spending.