Economic Highlights

Consumer Price Inflation hit a new cycle high of 11.1% in October, which was higher than expected. Energy price increases of 27% month-on-month were largely discounted, but food price increases were not. The core measure, which strips these out, was also above forecasts at 6.5%. This was driven by higher costs for recreational and cultural pursuits, while goods more affected by Covid-related supply chain problems (such as used cars) are falling in price again. This might well be the peak level for headline inflation, but it will be difficult for the Bank of England to relent on its policy tightening if the core rate remains elevated. The Bank’s cause was not helped by the Chancellor back-loading his cost-cutting plans to the post 2024 period in his Autumn Statement.

The latest employment data was firm on the surface, but there might be some cracks appearing, finally. More jobs were created than expected in September and the market remains tight, with as many vacancies posted as there are people unemployed. Wages are rising 5.7% year-on-year. However, the unemployment rate did pick up to 3.6% from 3.5%, and we would point out that the Office for Budget Responsibility is expecting that unemployment will rise to 4.9% as the recession unfolds.

The distortions of inflation could be seen in the latest Retail Sales figures. The Office for National Statistics noted that although the value of retail sales had risen by 14.2% since February 2020 (just before the pandemic – the end of “normal” times), volumes were actually 0.6% lower.

Retail Sales for October suggest a still-resilient consumer, with total sales value rising by 1.3% month-on-month versus an expected +1%, but we must remember the tailwind of rising prices. There were strong sales reports for cars, furniture and homewares, which was slightly surprising so close to the imminent Black Friday retail event. Anecdotal evidence suggests there were lots of bargains to be had, although it might well depend on who has best manged their inventory. With unemployment still low and plenty of excess savings in the bank from the pandemic period, the US consumer could yet surprise on the upside for a while. However, we still think that the effects of higher interest rates will slow demand in the end, especially if the Fed’s forecast of 4.4% unemployment is met.

November’s reading of the ZEW Indicator of Economic Sentiment showed investors becoming less pessimistic about the Eurozone economy. The expectations and current situation indices for Germany and the Euro Area jumped significantly above consensus expectations. Similarly, investors’ stock market expectations climbed to the highest levels since March. It seems that sentiment has troughed for now, possibly helped by a warm autumn which has alleviated pressure on energy markets and left natural gas storage facilities well filled.

There were further negative surprises in October’s domestic activity data. Retail Sales contracted by 0.5% year-on-year, and a rise in Industrial Production of 5% was below expectations. Residential Property sales are running -28.2% for the year to date against 2021. No doubt much of this is down to the zero-Covid policy, but there are also consequences from the crackdown on more speculative activity in the real estate sector. The latter factor is likely to create a more durable headwind to activity, but there are increasing signs that the Chinese authorities are planning to ease Covid-related restrictions gradually. However, such plans have been set back again by a rising number of cases and the first reported virus-related deaths for many months.