Economic Highlights

The key message from the figures for the UK labour market is that it remains tight. On the ILO measure, employment expanded by a substantial 214k in the three months to April, but because the participation rate increased a little, from 62.0% in the three months to January to 63.2%, the unemployment rate nudged down only slightly, from 3.9% to 3.8%. The soft spot remains self-employment, which is yet to recover to pre-Covid levels. There was yet another record level of vacancies, which amounted to 1.3m. Aggregate pay growth was disappointing, with total growth of 6.8% year-on-year (consensus 7.4%) on account of bonuses being somewhat softer than forecast: excluding bonuses, hourly earnings expanded by 4.2%, above consensus expectations of 4.0%, but till negative in real terms. The Bank of England pressed ahead with its latest interest rate rise of 0.25%. The vote was carried 6-3, with the dissenters opting for a 0.5% increase. Although the 0.25% increase was the minimum feasible, the post-meeting conference and statement made it clear that the Bank will continue to tighten policy, taking some pressure off the pound.

Industrial Production rose 0.2% month-on-month in May. That was below the expected 0.4%, but there was an offsetting upwards revision to April’s data. Reflecting the “blunt instrument” nature of such data, there was a boost from a 1% increase in output from utilities as a result of extra demand for air-conditioning thanks to unseasonably high temperatures in some regions; higher oil and gas prices boosted drilling activity; refinery output was also strong. This is not the sort of growth that we would ideally be looking for. Weakness was noted in machinery, fabricated metals, computers & electronics and aircraft. None of this came as a great surprise, but confirms the underlying economic deceleration that is becoming increasingly evident. That was also seen in data including Retail Sales, Building Permits, Housing Starts and the Philadelphia Fed Business Outlook survey. While nothing yet screams recession, neither is there anything to shift the Fed from its intended policy tightening path.

President Emmanuel Macron has lost control of the National Assembly in France after a strong performance by a newly formed left alliance and also the far right. The results indicate that Macron’s centrist Ensemble coalition remains the biggest party by winning 245 seats but has fallen well short of the 289 seats needed to control parliament. To deliver on his agenda, especially items such as pension reforms, Macron will need to bargain with the legislators, which looks like a tall order. The voter turnout was a very disappointing 46.2%, but the result does illustrate the appeal of more populist candidates, especially those making promises that they will struggle to fulfil without causing fiscal chaos. There was no reaction from equity, currency or bond markets to suggest that investors viewed this result as a major threat to stability, at least for now.

China’s industrial production unexpectedly rebounded +0.7% year-on-year in May (vs -0.9% expected), against a drop of -2.9% in April, whilst retail sales fell -6.7% year-on-year, better than the -7.1% projected decline and also better than April’s -11.1% plunge. Fixed-asset investment grew +6.2% year-on-year in the first five months of the year (vs +6.0% expected). There are tentative signs that China’s economy is bottoming out following the harsh zero-Covid restrictions. However, there was no urgency to press on with stimulus and Loan Prime Rates were left unchanged at the latest policy meeting.