Spring in the economy

Spring in the economy

The last couple of years have been hard for the UK economy. Growth has ground to a halt and consumer spending power has come under heavy pressure. The economy dipped into recession in the second half of last year. The general narrative about the UK remains downbeat, with a focus on weak growth and poor productivity. We think this underplays some of the more recent developments.

• Inflation, from which so many of the UK’s current problems stem, has collapsed, dropping from a peak of 11.4% to 3.4% in February. By May inflation is likely to drop below the Bank of England’s 2.0% target for the first time in three years. Lower inflation should pave the way for the Bank of England, and other major central banks, to cut interest rates. UK rates stand at 5.25% today. Financial markets expect the first 25bp cut in the UK base rate around the middle of this year with UK rates ending the year at 4.5%.

• Falling market interest rates are already feeding through to consumers and corporates. Interest rates on mortgages and corporate debt have eased back since the peaks seen in last summer. Financial conditions, as measured by our own financial stress index, remain good. The latest round of bank results shows little evidence of major distress in the household or corporate sectors. If inflation and rates fall as expected, credit conditions will ease.

• Bank of America’s latest survey of institutional investors shows that fund managers are more bullish on global growth than at any time in the last two years. The proportion of fund managers expecting a ‘hard landing’ for the global economy has dropped from 30% in October to 11% today. Risk appetite is rising. Global equity markets have risen by 6.0% in the last three months and European M&A activity picked up in the first quarter of this year.

• Falling inflation is bolstering consumer firepower with wage growth outstripping inflation. Cuts to National Insurance in the Budget and last year’s Autumn Statement will help consumers, though the gains will not offset the effect of freezing personal allowances which started in 2021 and will run until 2027. Unemployment is the dog that hasn’t barked in this cycle. Unemployment fell through the second half of last year even as the economy moved into recession. UK consumers are more confident about their own financial position than at any time since late 2021. Last month, Simon Wolfson, CEO of Next, one of the UK’s leading clothing retailers, said, “it has been a long time since we started a year in a more positive frame of mind.” Next’s share price has risen by 14% since the start of this year. It is a measure of how much things have changed for consumers that the Office for Budget Responsibility, the UK’s independent forecasting body, has raised its forecast for growth in real household incomes this year from -0.8% last November to 1.0% in March.
   
• Business confidence has edged up in recent months. The chancellor gave a shout out to Deloitte’s CFO survey in his Budget speech last month, citing improving levels of optimism which are now running at above-average levels. The Purchasing Managers’ survey confirms an improving picture for UK manufacturing and service activity in recent months. 
   
• Lower inflation and the prospect of interest rates cuts have bolstered housing activity.  Chartered surveyors report more properties are coming onto the market, growing interest from new buyers and, since August, higher sales. Halifax and Nationwide data show UK house prices have edged up since last October. Last week FTSE 250 housebuilder Bellway reported that sales were 21% higher in February and March than a year earlier.

• After a weak end to 2023, UK GDP growth rose by 0.2% in January. The mild recession that hit the UK in the second half of 2023 is probably over.

• The US seems to have navigated its way to an economic soft landing, with economists increasingly confident that 2024 will be another good year for growth. The UK is in poorer shape, but is showing signs of life. Barring shocks, UK growth should edge higher over coming quarters.

OUR REVIEW OF LAST WEEK’S NEWS 
The UK FTSE 100 equity index closed the week up 0.9% at 7,953. 

Economics 

• US manufacturing sector expanded for first time in 18 months in March in a sign of gathering growth
• US GDP growth was revised up from an annualised rate of 3.2% to 3.4% in Q4 2023 underscoring the resilience of the economy
• Christopher Waller, member of the US Federal Reserve board of governors, suggested that the central bank should “push back” the timing of interest rate cuts after “disappointing” inflation data 
• UK grocery inflation slowed to 4.5% in March, the lowest level in two years, as falling prices of butter, milk and toilet tissue helped to moderate price pressures
• Five of Germany’s top economic institutes slashed the country’s GDP forecast for this year from 1.3% to 0.1% as high energy prices weakened the competitiveness of its energy-intensive industry
• Germany’s monthly retail sales fell more than expected to 1.9% in February from a month earlier, prompting economists to forecast a contraction of GDP in Q1 2024
• Euro area bank lending to the private sector stagnated in February, as lending dried up after interest rates rose to 4%
• The Japanese yen dropped to its lowest level against the US dollar in 34 years, prompting the Bank of Japan to warn investors of market interventions
• The Mexican peso strengthened to the highest levels against the US dollar since 2015 even after the central bank cut interest rates following positive inflation news
• Cocoa prices rose above $10,000 per tonne for the first time, more than doubling in two months, due to poor harvests in Africa 

Business 

• US carmakers and insurance companies are set to face lower sales and higher costs following the Baltimore bridge collapse. The city is the US's largest vehicle import destination 
• International cruise operator Carnival Cruise Line raised its profit expectations for this year as higher prices and strong demand boosted earnings, however, they warned that the Baltimore bridge collapse may cause a $10m hit to profits due to higher costs
• The Bank of England’s Financial Policy Committee warned that “finance for riskier corporates could be particularly vulnerable to a significant deterioration in investor risk sentiment”, especially in the private equity market
• Online retailer Amazon committed a further $2.75bn to artificial intelligence start-up Anthropic, as Big Tech’s race to commercialise AI intensifies
• Former US president Donald Trump’s social media business Truth was floated on the Nasdaq and its share price rose by 22% by Wednesday
• The advertising agency S4 Capital said that “challenging global macroeconomic conditions” and “fears of recession” are reducing demand for its services as it posted a 25% drop in profits
• UK property developer Bellway reported a 20% increase in sales in the year to February, signalling a tentative pick up in the UK housing market

Global and political developments

* The Syrian and Iranian governments accused Israel of a missile attack on an Iranian diplomatic building in Damascus that killed a senior Iranian general

* Israeli prime minister Benjamin Netanyahu agreed to send officials to Washington to discuss its planned Rafah operation despite the UN passing a resolution calling for an “immediate ceasefire”  

* The UK apprenticeship minister Robert Halfon and armed forces minister James Heappey resigned, triggering a mini reshuffle in Rishi Sunak’s government 

* Ukrainian president Volodymyr Zelenskyy dismissed the head of Ukraine’s national security and defence council Oleksiy Danilov

* The US and the UK accused China of cyber-attacks on politicians and companies as the US Department of Justice indicted seven Chinese nationals alleged to have sent malicious emails with hidden tracking links

* Labour deputy leader Angela Rayner rejected a suggestion from Lord Peter Mandelson, a former Labour adviser, that a Labour government should consult with business on its plans to reform employment law. Ms Rayner likening Lord Mandelson’s complaints to the “squealing” by business over the introduction of the minimum wage
 

And finally… in a promotion for the summer Olympic Games, waiters and waitresses raced through the streets of Paris balancing trays with croissants, coffee and glasses of water to find out who is the fastest server in France – tray-athlon