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UK in Focus: No man’s land

21 Oct 2024

Key takeaways

  • Economic growth is on track to slow in H2 2024.
  • Headline inflation rate fell below the 2% target …
  • … but services inflation and wage growth remain too high.

Source: HSBC

… but services inflation and wage growth remain too high

A looming fiscal event (30 October) and upcoming monetary policy meeting (7 November) have placed an even greater focus on the latest round of UK economic data and what they could mean for policy. For monetary policy, we see the Bank of England opting for a second 25bp cut in Bank Rate, taking it to 4.75%. However, the inaugural Budget for Chancellor Reeves is more uncertain. The health of the public finances and additional hole identified in July means we expect a little more of everything: spending, tax and borrowing, as well as a change to the fiscal rules.

While policy unknowns have put many in no man’s land – consumer confidence fell 7pts in September to its lowest level since March – official data have been more benign. GDP growth in August was 0.2% m-o-m, the first expansion since May and driven largely by a rebound in automotive manufacturing. Meanwhile, indications for output growth in September are positive with retail sales up 0.3% m-o-m and the PMI survey recorded an 11th month of expansion. That said, soft underlying momentum means growth is on track to slow on a quarterly basis: we forecast 0.3% per quarter for Q3 and Q4 2024.

Inflation falls below 2% but it’s the labour market that carries the risk

Headline CPI inflation rate fell to 1.7% y-o-y in September, a faster moderation than we and the Bank of England had expected. This marked the first reading below the inflation target of 2% since April 2021. By far the biggest downward contribution was from the transport category: a decline in petrol prices on the month and a larger than normalSeptember fall in airfares. However, for the BoE, their focus will be on services inflation, which moderated to 4.9% y-o-y from 5.6%. On a preferred gauge that adjusts for volatile prices such as airfares, the moderation in ‘core’ services inflation was smaller.

That could keep some on the MPC cautious that the risk of persistent price pressures remains. They could find comfort in the fall in private sector wage growth to 4.8% in August, a 28-month low, as well as vacancies, payroll data, and surveys all suggesting a softer labour market. Yet the official Labour Force Survey pointed to a retightening. The unemployment rate fell to 4.0% in August and employment rose 373k, albeit the reliability of that survey is in question. Overall, with ambiguity in data and wage growth still too high to be consistent with a 2% inflation rate over the medium term means some MPC members may want to see further progress in both wage growth and services inflation, consistent with our view that rates will be cut more meaningfully in 2025.

Source: Macrobond, ONS

Source: Macrobond, ONS, HSBC forecasts

Source: Macrobond, ONS, HMRC

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