 The UK economy grew at a faster rate in the first quarter of the year, according to the latest update from the Office of National Statistics. Rishi Sunak hailed the growth figures as the "fastest growth in the G7." Growth is even better than "gangbusters", the excitable claim from Grant Fitzner, chief economist at the ONS, when the first estimate of GDP growth was announced in May. "The next Prime Minister is likely to inherit an improved economy" according to Jane Croft and Larry Elliott in the Guardian.
But will the economic revision be enough to save Sunak? I doubt that. Just four days before polling day, the Tories still trail Labour by 20 points in the polls but more of that later. First let's get the growth revision into perspective. GDP growth rose by 0.3% year on year according to the GDP Quarterly National Accounts released on Friday. The first estimate released on the 10th May, marked growth year on year at 0.2%. An improvement OK but not by much. Headlines react to the ONS statement which leads with growth rate quarter on quarter. At the end of the day, (make that the end of the year), it is the growth rate year on year which counts. Year on year, the performance was mixed. Manufacturing was up by 1.7%. Construction was down by 0.4%. Service sector growth was up by 0.4%. The transport and Storage sector was down 0.8%. Accommodation and Food, was down by over 1%. Don't break out the bunting just yet. Yes, the next prime Minister will inherit an improving economy. Growth could be as high as 0.5% in the second quarter. On track for growth of between 0.5% and 1.0% this year. It may well be Rachel Reeves that is the real winner. But the economy will need to grow at a much faster rate to allay fears over spending and borrowing Will It Save Sunak ... Just four days before polling day, the Tories still trail Labour by almost 20 points. The latest YouGuv survey has Labour on 36%, the Tories on 18%, just ahead of Reform at 17%. The Farage rally has fizzled out. Statements on Putin and Ukraine add the odd hint of racism and right wing extremism in the mix. Not for everyone, the economics of the tap room from a platform of the bar stool. In terms of seats, Labour could pick up over 220 seats in the house, with 425 MPs in the final count. The Conservatives would be left with just 108 seats, leaving Lib Dems with 50 plus and Reform with just five MPS. That's a big win for Starmer and a massive set back for the Tories. A growth rate of 0.3% is not enough to save Sunak ... That's all for now. Have a great weekend break ... Watch out for our update on the US election, the first debate described in the Telegraph, "not so much a debate more a medical emergency". Don't miss that!
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 Lots of economic data to add to the mix this week. Retail sales bounced back in May from a disappointing April. Month on month, sales volumes increased by 2.9% following a fall of 1.8% prior month. Year on year sales were up just 1.3% in volume terms, up 2.2% in value. The ONS warns data may have been affected by the extra bank holiday for the coronation of King Charles III.
If so, the loyal subjects were not drinking much, alcohol sales were down by 11.5%. Flag waving appeared to boost textile sales by 16.5%, footwear sales were up by 15%, cosmetic sales were up 11% and making music was up by 18%. We don't usually comment on the retail sales figures. I fear they are suffering from "Long Covid". Lies, damn lies and statistical adjustments part of the problem. Public Sector Finances ... The last update on Public Sector finances before the general election was released yesterday. Net debt edged up to £2.7 trillion pounds, that's 99.8% of GDP. Borrowing in the merry month of May, was £15 billion pounds. £33.4 billion for the first two months of the year, compared to £33.0 billion in the first two months last year. Borrowing is on track for another £120 billion this financial year, unless fortunes change for the new administration. Inflation Hits Target ... Consumer price inflation, CPI basis, hit the 2% target in May down from 2.3% in April. Goods inflation fell from minus 0.8% to minus 1.3%. Service sector inflation eased from 5.9% to 5.7%.Core inflation (excluding energy, food, alcohol and tobacco) increased by 3.5%. CPI inflation was expected to fall to target 2.0% in the second quarter, according to forecasts from the OBR and The Bank of England. The 2% target is not expected to hold. The Bank is concerned about the high level of service sector inflation and the high level of wage settlements. Producer prices appear to have "bottomed out". Our money supply model has also flagged the turn. The inflation arithmetic (goods and services) was 2.2% in the month. Inflation may have touched target in the second quarter. It's more of a "touch and go". Just like an aircraft, touching down on the tarmac and immediately taking off again. The Bank expects CPI inflation to increase and to average 2.5% in the final quarter. Bank Holds Rates ... Despite the headline inflation rate hitting the target, the Bank of England decided to keep interest rates on hold at 5.25%, reflecting ongoing concerns about persistent inflation in the services sector and the broader economy. "Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates." Analysts are divided on the timing of potential rate cuts, with some expecting reductions as early as August, while others anticipate delays until later in the year. For the moment, our overall forward guidance outlook is changing. We expect a series of two base rate cuts in the current year possibly beginning in August. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025. But then again, don't bet on it ..  The Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at its current level of 5.25%-5.5% at the June 2024 meeting. The decision reflects the Federal Reserve's cautious approach as it continues to monitor inflation and economic activity. Despite some signs of easing inflation, the Fed remains vigilant, emphasizing the need for "modest further progress" toward the 2% inflation target before considering significant rate cuts.
Inflation has shown signs of cooling, with the Consumer Price Index (CPI) for May at 3.3% down from 3.4% in April. However, core inflation at 3.4% remains a concern. Producer prices index eased to 2.2% last month, from 2.3% in April. Core prices, excluding food an energy held at 3.2%. The Fed is looking for more evidence of consistent data moving to target, before making any substantial policy changes. The Fed's decision to hold rates steady comes amid a robust economic backdrop, with strong job gains and low unemployment rates. Growth in the first quarter was up 2.9% year on year. Jobs growth in May was "very strong" with an increase of 272,000 jobs. In contrast, the unemployment rate increased to 4.0% in May from 3.9% prior month. Then, new weekly filings for jobless claims, unexpectedly spiked to 242,000 this week, a ten-month high, raising concerns about growth in the rest of the year. No wonder, the central bank remains wary of prematurely easing policy, which could risk reigniting inflation. Fed Chair Jerome Powell and other officials have indicated a preference for a "go-slow" approach to rate cuts, emphasizing the need for more data to ensure inflation is on a sustained downward path. The FOMC's latest 'Blue dot" projections suggest only one rate cut is likely before the end of the year, a reduction from earlier expectations of multiple cuts. While the FOMC has left the door open for potential rate cuts later in the year, the likelihood of significant easing remains low unless there is clear and sustained progress in reducing inflation. The Fed's cautious stance underscores its commitment to achieving long-term price stability before making any substantial policy shifts. Markets now expect just one cut this year, it could be as late as December. We would still consider two cuts a possibility, those blue dots do bounce about ...  Next week, it will be the turn of the MPC to make the big rates decision. The Bank of England's Monetary Policy Committee (MPC) is expected to hold interest rates at 5.25% at the upcoming meeting on June 20, 2024.
Will the MPC cut rates? Market expectations, based on overnight index swaps, suggest that August 3 is the more likely date for the first rate cut since 2020, with at least one more cut anticipated by the end of the year. While UK inflation has been falling, it remains a concern. As with the Fed, the Bank is cautious about easing monetary policy too soon, which could lead to a resurgence in inflation expectations. The latest data indicates that inflation CPI basis is expected to fall towards the 2% target but will rise again later in the year. The latest U.K. economic data suggests the economy expanded by 0.6% in April, year on year compared to growth of 0.2% in the first quarter. News headlines report growth was flat but that is month on month. We always use the year on year comparison. The unemployment rate increased to 4.4% from 4.3% in April. The number unemployed increased to 1.51 million, up 24,000. The number in work fell by 30,000. Vacancies fell by just 4,000 to 904,000. Earnings three month basis were steady at 5.9%. The single month data suggest earnings slowed to 5.5%. The housing market is slowing as fixed rate mortgages unwind but real earnings CPI basis increased to 3.6%. It's a mixed picture, which could suggest an economy at a turning point. Perhaps to soon yet to move ahead of the curve. The Bank of England will also consider the broader international economic environment. Recent growth has been stronger in the United States than in the euro area. Inflationary pressures have moderated somewhat but remain a concern. The divergence in monetary policy expectations between the US and Europe, adds complexity to the decision-making process. The upcoming general election on July 4, 2024, is a further factor. The Bank may prefer to wait until after the election to make significant policy changes. A new [Labour] government will change the economic landscape with new tax and spending plans and a few surprises. In summary, while there is some speculation about a potential rate cut in June, the consensus among market participants and analysts is the Bank of England will hold rates at 5.25% next week, with a more probable rate cut occurring in August and one further rate cut possible this year. As always we recommend a model scenario of base rates at 4.5% in the years ahead, no return to Planet ZIRP ...  The Tories face an extinction level event according to the latest YouGuv poll. Asked if there were a general election tomorrow, which party would you vote for, the Labour party claimed 40% of the vote compared to the Tories down to just 19%. Worse still the Reform Party, now lead by Nigel Farage polled 17% just two points behind the Conservative party.
Promising to reduce net migration to zero has wide appeal apparently. Reform policies and spending plans would appear to make Liz Truss as cautious as a fiscally prudent lettuce. Stop the Boats. Leave the European Convention on Human Right. Increase personal tax threshold to £20,000, raise the higher rate threshold from £50,270 to £70,000. Abolish inheritance tax, abolish VAT on energy bills. scrap VAT tourist tax,Increase defense spending to 2.5% of GDP by 2027 and 3% by 2030. Excise duties on beer under the cosh. The two point gap behind the Tories could be closed over this weekend. John Rental writing in the Independent suggests thatat least one poll is likely to show a “crossover” between Reform and the Tories in the next few days. "A headless chicken panic will strike the Conservatives when that happens." Perhaps that's why the Prime Minister abandoned his D Day landing to return to canvass in the UK. Sunak has since apologised for the misjudgement and mistake. A further example of miscalculation from the Tory leader in the election run up. The Labour party is heading for a two hundred seat majority in the house. 422 seats with the Tories down to just 140 MPs. The LibDems would still be the third largest party in the House of Commons. At the moment, no place in Westminster for Reform. Not even Nigel Farage is first past the post.  The European Central Bank (ECB) made a big move this week, cutting interest rates for the first time since 2019. This decision, announced by ECB President Christine Lagarde, marks a pivotal moment in the ECB's monetary policy, reflecting a shift in response to evolving economic conditions in the eurozone.
The ECB reduced its key interest rates by 25 basis points, bringing the main refinancing operations rate to 4.25%, the marginal lending facility rate to 4.50%, and the deposit facility rate to 3.75%. This decision was driven by several factors, primarily the need to support economic recovery and address inflation dynamics. The eurozone has experienced a significant reduction in inflation, from a peak of 10.6% in October 2022 to 2.6% in May 2024. This decline in inflation was a result of the ECB's previous aggressive rate hikes, which totaled 450 basis points between July 2022 and September 2023. The hikes were instrumental in curbing inflation but also led to a slowdown in economic growth. The eurozone's economy expanded by only 0.3% in the first quarter of 2024, following contractions in the previous two quarters. The timing of the rate cut is crucial. Lagarde emphasized that the decision was based on a revised assessment of the inflation outlook and the strength of monetary policy transmission. The ECB's projections indicate that while inflation has not yet reached the 2% target, it is on a downward trend expected to continue in the coming months. The average inflation rate is projected to decrease to 2% in 2025 and 1.9% in 2026. Lagarde stressed that the ECB's future decisions would remain data-dependent and that the central bank is not pre-committing to a specific rate path. This cautious stance reflects the ECB's need to balance the risks of cutting rates too much against those of cutting too little. Rapid and significant rate cuts could boost consumer demand and investment but also risk rekindling inflationary pressures before the 2% target is fully achieved. The ECB's latest projections suggest a slight upward adjustment in economic growth and inflation for 2024, while maintaining the 2% inflation forecast for 2025 unchanged. This indicates that while the ECB is confident in the current disinflationary path, it remains vigilant about potential risks, including geopolitical tensions and energy prices, which could impact inflation dynamics. Market analysts generally agree that the ECB will likely hold rates steady at its next meeting in July, with the possibility of resuming cuts at a slow pace in September. The ECB's cautious approach is reflected in its emphasis on monitoring economic data closely before making further adjustments. This strategy aims to ensure that monetary policy remains appropriately restrictive to guide inflation back to target levels without stifling economic growth. The ECB's decision also positions it ahead of other major central banks, including the Federal Reserve and the Bank of England. Both have yet to begin lowering rates. This divergence in monetary policy could have significant financial impacts, particularly on exchange rates, as aggressive rate cuts by the ECB could put downward pressure on the euro against the dollar, potentially raising the price of imports and affecting inflation. For the moment, markets are largely unmoved. The Euro trades at $1.0895 this morning compared to $1.0848 last week. Sterling trades pretty much unchanged. |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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