Signs of recovery

The UK continues to piece together its economic recovery. Households might be turning a little less cautious (savings levels have been very high of late) and the housing market looks to be getting back into recovery mode after a brief hiatus through H1. But the current sweet spot for household income growth looks set to give way to more paltry gains. Not least because of the economy’s inability to crack the productivity code. In the Eurozone, inflation continued its difficult last mile down, while US inflation data, registering its slowest pace of increase this year, should support the Fed’s intention to cut rates later this month.

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What’s the latest in the UK?

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Signs of life in the financial runes. Follow the money, as they say in thrillers, and all will be revealed. Well, July saw the value of outstanding mortgages rise for the sixth month running (+￡2.8bn m/m), whilst home purchase mortgage approvals recovered to 62k. That bodes well for the housing market in H2. Meanwhile, in a sign that UK plc continues expanding, the money supply (M4ex) increased by ￡10.2bn (+1.7% y/y). Households drove the increase, adding ￡5.7bn to bank deposits. Despite still saving intensively, the fact households put one-third into instant access accounts suggests prudence may turn to profligacy before long. Read more here .

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Britain's productivity puzzle persists. Despite the pandemic's short-term disruptions, productivity growth has reverted to its anaemic pre-2020 trend. Flash estimates for Q2 2024 show output per hour worked dipped 0.1% YoY, while remaining 2.1% above the pre-pandemic level. The manufacturing sector provided the largest boost. But a negative "between-industry effect" suggests activity is shifting to less productive sectors. This is the second consecutive quarter a negative re-allocation effect has been measured. The cumulative annual growth rate since 2019 was a paltry 0.5%. Alternative measures using PAYE data paint an even gloomier picture. As Britain grapples with economic headwinds, its stubborn productivity malaise continues to confound policymakers and hamper growth prospects. Read more here .

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Brief relief.? The Resolution Foundation's annual review of living standards shows 2024 to have been a good one for most parts of the income distribution.? Above-inflation wage rises helped propel projected real incomes up by between 2-4% for most people, providing some relief for the pain dealt out by rapidly rising prices in 2022 and 2023. But rising housing costs in the coming years, and a budget where taxes are expected to rise, both threaten to upturn this trend. Once again, only the return of productivity growth can guarantee sustainable real income growth for all. Read more here .

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Mortgage rates down, house prices up. That’s the story according to the latest Nationwide house price index. Prices rose 2.4% in the year to August, a faster pace than the 2.1% registered the previous month.? A slight easing of mortgage interest rates may have been a driver. A typical 2-year fixed, 75% LTV deal had fallen to under 5% in July and will have fallen further in August. Volumes were encouraging too.? July was already the most active month in nearly two years with signs of further pick-up in August. Expect more strength in the months to come. Read more here .

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What’s the latest in the Eurozone?

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It’s like before, but different. Or in the words of Mark Twain, history doesn’t repeat, but it does rhyme. Eurozone annual inflation has likely fallen to 2.2% in August, from 2.6% in July. With ‘core’ inflation, so excluding the most volatile bits, at 2.8%. But as elsewhere, services inflation is persistently higher – running at 4.2%y/y (up from 4.0%) – while industrial goods inflation is just 0.4%. This echoes inflation for much of the noughties, where greater supply capacity in globally-produced goods meant inflation ran much lower than services. It’s just that today services inflation is getting on for twice the pace it was back then. Read more here .

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August brought a modest improvement in economic sentiment. The Economic Sentiment Indicator (ESI) rose by 0.4 points to 96.9. The Employment Expectations Indicator rebounded more robustly, up 0.9 points to 99.6, nearing its long-term average. However, this improvement masks significant regional and sectoral disparities. France's sentiment surged, while Germany's deteriorated. Industry, services, and retail trade gained confidence, yet consumer and construction sentiment stagnated. Notably, selling price expectations eased in retail and industry, potentially signalling easing inflationary pressures. The continued decline in economic uncertainty offers a glimmer of optimism, but the ESI remains below its long-term average, underscoring persistent economic fragilities. Read more here .

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What’s the latest in the US?

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July inflation data is spot on for the Fed. The Fed’s preferred measure of inflation rose 0.2% from June. Using that to calculate the three-month annualised pace (which gives a cleaner read on inflation’s trajectory) gives a figure of just 1.7%, the slowest pace this year. Just what the Fed would be looking to see as it looks set to begin cutting rates later this month. US data last week more broadly was supportive to the ‘US soft landing’ camp (durable goods orders aside). Personal income and spending data for July came in ahead of expectations, although US consumers are sustaining their habits via very low savings – not a sustainable pillar of support. Read more here .

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Durable goods orders surged by 9.9% in July but underlying trend remains weak. The increase was largely due to a 34.8% rise in transportation orders, following a 20.6% drop in June. However, the underlying trend remains weak, with aircraft orders contributing significantly to volatility, which were down by nearly 70% (three-month-on-three-month) compared to a year ago. Excluding transportation, orders fell 0.2%, suggesting a flat trend since last year. Nondefense capital goods orders ex-aircraft decreased by 0.1%. Core shipments dropped more than the fall in core orders, indicating an annualized growth rate in the three months to July of -4.5%. Forward-looking Fed surveys predict further declines in core shipments. Read more here .