Disappointing data caps 2023 for the UK
A disappointing end to year for the UK, at least from a data perspective. Today’s final reading of the Q3 growth number showed output revised down from 0.0% to -0.1%, while the estimate for Q2 was also revised lower, from 0.2% to 0.0%. These two revisions together have now halved y/y growth over Q3 from 0.6% to 0.3%, an unwelcome development that will not be lost on the markets and will simply fuel further the growing fears about the risk of the UK economy falling into recession.
The growth figures showed that the impact of the Bank of England’s (BoE) monetary tightening is very much starting to bite, with both households and businesses cutting back expenditure in favour of replenishing savings and/or paying down debt. The reported rise in the household savings ratio in Q3 to 10.1% from 9.5% in Q2 is very much testament to this change in spending habits, the ratio moving further away from the average 6.3% level seen over the second half of the last decade, a worrying trend in an economy where domestic consumption is responsible for nearly two-thirds of nominal GDP. And on the business side, real investment fell by 3.2% over the quarter, a reversal of the picture seen over Q1 and Q2, and bringing total investment back to the average levels also seen over the second half of the last decade, a worrying development in terms of what it means for productivity gains and growth going forward.
The numbers mean that the UK is now at serious risk of falling into a technical recession – defined as two consecutive quarters of negative growth – something that the BoE assigned a 50% chance of seeing in its November Monetary Policy Report, and will almost certainly see pressure grow on the Monetary Policy Committee (MPC) to step back from its “higher for longer” rhetoric and instead pivot policy towards preparing the market for interest rates to be cut. Indeed, following today’s data, the markets are now pricing in around 130bps of easing to be delivered over the course of 2024.
Accompanying the output numbers were the retail sales figures for November, which showed sales rising 1.3% on the month and providing, at first glance, something of a foil to the disappointing growth numbers. However, the picture painted here is not as bright as it at first seems. Firstly, the -0.3% reading seen in October was largely the result of the disruption to spending patterns caused by the stormy weather seen over the month and, as such, something of a bounce-back was always expected to be seen in November. Secondly, November saw £300 cost-of-living grants made to those in receipt of working-age benefits, the bulk of which was always expected to be spent. And finally, a temporary boost to spending was also provided by the annual Black Friday event, something that will not be sustained. All in all, therefore, the strength of consumer spending in the UK remains far from rosy, a fact reflected by the fact that on an annual basis, sales volumes overall were 2.3% below the level recorded in November 2022.
Going forward, the performance of retail sales over 2024 will be very much dependent upon how far and fast CPI falls, whether or not wages growth will continue to show real gains, and how much of a drag on spending the on-going refinancing of mortgages at higher rates causes, a factor that will be largely determined by how far and fast the BoE is inclined to cut interest rates over the course of the year.
Looking at today’s data as a whole, for sterling it suggests a bumpier journey is in store for 2024. The recent strength seen has been largely attributable to the widening interest rate differential expected between the pound and its peers going forward, as the BoE has attempted to push back firmly against market expectations of potential interest rate cuts. But with this week’s CPI numbers showing inflationary pressures continuing to weaken, coupled with today's data showing economic activity stalling, the pressure on the BoE to relax this stance is only going to increase. But the BoE remains concerned about the strength still being seen in wages growth, which is incompatible with a 2% CPI target, and by the fact that core CPI is still more than double its target. It will want to see more progress made on both these fronts before it will publicly acknowledge the time for considering an easing in policy has arrived. This view will be at odds with the market, which is already ahead of the BoE in terms of how far down the road it is with its own easing agenda. This will leave sterling exposed to the arguments of both camps and accordingly more exposed to forthcoming data releases than it might otherwise have been.
Looking at today’s data releases together, they suggest a bumpier journey in store for sterling in 2024