Sunshine After Gloomy Weather

The UK economy emerged from April's downpour with a hopeful outlook. Retail sales marginally recovered in May, fuelled by falling inflation and brighter weather. The housing market remained resilient too. We’ve talked a lot about central banks this year, without much action, but last week the Eurozone became the first big mover, cutting rates by 25bps. Meanwhile politics remains prominent with the UK parties expected to publish their manifestos this week and the results from the EU Parliament poll prompting a snap election in France.?

Check out a glossary of key terms here .

What’s the latest in the UK?

UK’s domestic conditions likely turning favourable for rate cuts. May’s Decision Makers Panel Survey reveals businesses facing lower cost pressures than anticipated with some evidence of margin compression. This favourable mix together is paving the way for future rate cuts in the UK.? Unit cost growth came in lower than expected in May compared to forecasts made a year ago, and firms are even more optimistic, predicting a further decline to 5.4% in the coming year. Despite some lingering price pressures, the pass-through to consumers is likely to be limited. Businesses expect their output price inflation to dip over the next year, falling from 4.0% in the three months to April to 3.9% in the three months to May. Once again, retreating wage growth expectations are paving the way for future rate cuts. Read more here .

Retail sales on the mend after April’s washout. The wet weather and uptick in mortgage rates have weighed down on consumer spending during the Spring, but the British Retail Consortium retail sales for May showed that the situation is now stabilizing. Annual growth remains subdued at 0.7% (compared to 3.9% a year ago and consensus, 1.2%), but it was a welcome improvement from April’s figure of -4% .?The real sales still likely grew despite muted value growth figures, given the falling inflation. In particular, non-food goods prices have declined by 0.8% YoY as per the BRC Shop Price Index. Looking ahead, warmer weather, upcoming benefit hikes and continued recovery in the household incomes are expected to boost spending even with a higher-than-usual saving rate. Read more here .

Wage pressures remain a live issue.? There’s much speculation over the fallout from April’s outsize jump (+9.7%) in the National Living Wage. Hard data are now trickling in. Fully one-quarter of businesses hiked hourly wages in April, the most in at least two years. By late May, nearly one-third of businesses were reporting an increase in staffing costs over the past three months. Unsurprisingly, firms in the low-paying hospitality industry are most likely to have upped wages (62% of them), whilst well-paying professional and ICT sectors were least likely to have done so (13%). Don’t expect pay pressures to disappear either: 18% of businesses expect staffing costs to rise in the next three months, similar to last year. Read more here .

UK house prices remain largely static. In May, Halifax HPI dipped marginally by -0.1% month-on-month. The annual growth accelerated to 1.5% from 1.1% in April, slightly weaker than Nationwide HPI figures.?The market continues to show signs of resilience despite ongoing affordability pressures due to the increase in long-term interest rates.?The stability is supported by strong nominal wage growth, improved economic confidence and growing activity in the housing market. Looking ahead, a period of stability in house prices and interest rates is expected, as?home buyers are gaining confidence, though borrowing costs and limited property supply will continue to influence market dynamics. Read more here .

The latest Chief Economists Outlook survey reveals cautious optimism about the global economy. In the May survey, far fewer Chief Economists are expecting global economy weakening this year (17%) compared to January (56%). Inflation expectations are moderating, and the outlook has brightened for America and Asia, though Europe remains sluggish. Corporate decisions will be driven by economic fundamentals like growth (100%), monetary policy (86%) and labour markets (79%), but also geopolitics (86%) and domestic politics (71%). Respondents predict global growth returning to 4% within five years, spurred by technology and green transition but hampered by politics, debt level, and climate change. Favoured policies include innovation, infrastructure development, skills improvement, and looser monetary policy. Read more here .

Chart of the Week – Clean Sweep. May's UK PMI might have slipped a little to 53.0 (down from April's 54.1) but the data also showed that growth was more evenly spread across the country, with all 12 regions recording a score of 50 or more, indicating growth. London relinquished its status as fastest growing region, where it had been for 20 out of the last 24 months, overtaken by Northern Ireland and Scotland. Firms also reported that price rises were only modest last month, with businesses in the Midlands reporting the weakest pricing pressures, something that the Bank of England will be especially keen to see. Read more here . ?

What’s the latest in the Eurozone??

The reversal won't be rapid. The European Central Bank cut its benchmark rates by 25bp last week, joining its Swedish, Swiss and Canadian counterparts who have all commenced reversing the rate hikes of recent years. The move was well telegraphed. But it was a cautious cut, with still elevated cost pressures highlighted by the Bank. Indeed, inflation forecasts were revised up with 2026 now the expected date when inflation returns to 2%. Market pricing indicates the next cut might not be until October. If there’s one sentence that could sum up the economic narrative so far, it’s “sticky inflation limiting room for rate cuts”. In that, the Eurozone is no different. ?Read more here .?

What’s the latest in the US?

US labour market remains stable, with wages continuing to rise despite a slight uptick in unemployment. In May, the unemployment rate increased to 4%, up from 3.9% in April and 3.7% a year ago. Nonfarm payrolls added 272,000 jobs, driven by strong gains in health care, government, leisure and hospitality, and professional services. However, these job figures are often subject to downward revisions, which the Fed will monitor closely. Wages rose by 0.4% in May, culminating in a 4.1% increase over the past year. Overall, the labour market shows resilience with steady job growth and rising earnings across key sectors. Read more here .

You’ve made it to the bottom of the Briefing. If you’re a NatWest Group colleague, we’d love to hear your feedback and suggestions on the Chief Economist Weekly Briefing’s by filling out this quick?survey .