Economic Highlights

There were finally some signs of respite in the previously very tight jobs market, although there is still plenty of support for strong wage growth. Job vacancies dropped in January by 20k to 1.134m and there were also signs of more people looking for work, but that was not enough dislodge the unemployment rate from a still low 3.7%. Average weekly wages rose by 5.9% in the three months to December 2022, which was down from 6.4%, but on an ex-bonus basis rose from 6.4% to 6.7%. There was better news on inflation, with the headline rate dropping faster than expected to 10.1% and the core rate also from 6.3% to 5.8%. Lower energy prices are helping, and that might also have been a factor in stronger January retail sales than forecast, which grew 0.4% over December. More worrying, especially for lower income households, was the fact that food price inflation surprised again to the upside, remaining unchanged at 16.8%. That’s its joint highest rate since September 1977.

Although US inflation indices continued to decline, it was not by as much as expected. Headline CPI of 6.4% year-on-year in January was lower than December’s 6.5%, but higher than the forecast 6.2%. Similarly, headline CPI fell from 5.7% to 5.6% but that was more than the forecast 5.5%. It’s clear now that Goods prices are flattening, and might even start falling. All the upward pressure is on Services, as spending patterns shift to more social activities. There is also a kicker from the “shelter” component of inflation, which is effectively housing rent. Here, though, more timely data from the housing industry suggests some relief is on the cards. Retail Sales (+2.3% month-on-month) were a lot stronger than expected (+0.9%), but might be no more than a reflection of mild weather. New York enjoyed its first snow-free January since 1973. We might have to wait a month or two to see the underlying trend.

The EU managed to avoid negative growth in the fourth quarter of 2022, but, as in the UK, it was by a small margin. GDP grew just 0.1% from the third quarter. The region benefitted enormously from a mild autumn and early winter, which meant that stockpiles of natural gas were more than sufficient to see it through. For the year as a whole, growth came in at 1.9%, which was a good performance given the effects of Russia’s invasion of Ukraine and Europe’s dependence on supplies of key commodities from the region. There was some assistance from the EU Recovery Fund, a legacy of the Covid pandemic, which has taken a while to be disbursed, but the arrival of the funds was timely.

The latest house price data suggested that the market might be on the turn for the better, at last. The prices of newly built homes across 70 medium and large Chinese cities were broadly unchanged in January from December. This marks the end of a 16-month-long streak of falling home prices. Other data shows that an increasing share of cities are experiencing rising house prices on a year-on-year basis. To the extent that this indicator typically leads annual price growth in the 70-city aggregate measure, it foreshadows positive year-on-year growth in home prices. Chinese authorities have rolled out easing measures to revive the property market. In November, policymakers announced a 16-point plan focusing on providing financing to property developers. However, don’t expect a housing boom. The financing will mainly be directed towards completing unfinished and pre-sold homes. Home-buyer sentiment remains depressed, property demand is weak, and property developers’ inventory-to-sales ratio has been rising – indicating that there is a glut of unsold homes. While we believe that the post-Zero-Covid economic bounce will happen, China’s economic recovery this time will look a bit different to the past, with greater emphasis on consumption and less on building.