Economic Highlights

UK economic activity stagnated in February 2023 with GDP flat month-on-month . Consensus estimates had been for a 0.1% rise and followed an upwardly revised 0.4% gain in January (first estimate: +0.3%). Digging into the details, this report highlighted the impact that industrial action is having on the economy, with a 0.1% decline in services output driven by a 1.7% fall in education owing to strike action that occurred during March. There was also a 1.1% drop in public administration output, another sector plagued by walkouts in February. Industrial output was also disappointing, contracting by 0.2% on the month. Helping to avoid an outright contraction in total GDP was the construction sector, where output expanded by 2.4% month-on-month as warmer weather boosted workflow, although the impressive monthly rate should be considered in the context of a 1.7% fall in January. In all, with the combined forces of industrial action, aggressive monetary tightening and stretched household budgets, it is unsurprising that the UK economy is struggling to find any momentum.

Headline US CPI inflation fell for the ninth consecutive month, hitting 5% in March from the 6% recorded in February. This was marginally lower than consensus which was expecting 5.1%. Headline inflation is now 4.1% below its June peak. We would caution that although any decline in inflation is certainly a positive development, this fall was largely driven by one component of consumer spending – energy prices – which declined by 3.5% in March. When excluding energy and food prices and looking at the core measure, the annual rate actually increased in March, a factor the Federal Reserve will take note of. Core inflation ticked up by 0.1%, as expected, to 5.6%, reversing the progress made last month, but still 1% off the peak. Although we believe that this core measure will turn lower once again before long, helped by an easing in shelter price inflation as signalled by new rental lease prices, we expect the current stickiness will encourage the Fed to raise the Fed Funds rate at least once more. That belief was cemented by a big jump in the one-year inflation expectations number in the University of Michigan Sentiment Survey. It jumped from 3.6% in March to 4.6% in April against expectations of 3.7%. And while longer term expectations remain reasonably well anchored at 2.9%, the fact that the front end of the inflation expectations curve keeps refusing to lie down must be of some concern.

It was a quiet data week in Europe, but everything that was published on a eurozone-wide basis beat expectations. These included the April Sentix Investor Confidence survey (-8.7 vs expected -10.1 and -11.1 in March); February Retail Sales (-3% year-on-year vs expected -3.5% with January revised up from -2.3% to -1.8%); and February Industrial Production (+2.0% year-on-year vs expected +1.9% and +0.9% in January). There is no doubt that Europe is recovering from its energy shock, which is positive. But sticky inflation means that the European Central Bank is definitely going to raise interest rates at May’s meeting. The only question is whether it will be by 0.25% or 0.5%.

China is one country that stands out as not having an inflation problem. Annual CPI was just 0.7% in March, lower than the expected 1%. This allows the government to stimulate the economy, and evidence of that was seen in new yuan loans of RMB 3.98tn being created in March, against an expected RMB 3.3tn. That was up from RMB 1.8tn in February. There was also good news on the trade front, with Exports falling 7.1% year-on-year against an expected decline of 14.8%.