Economic Highlights

Last week’s UK data perfectly encapsulate the difficult position in which the Bank of England finds itself. Inflation is still too high and the jobs market is still too tight, both factors would lead it to tighten monetary policy. But economic activity, at least as measured by Retail Sales, are weak, which might otherwise elicit looser policy. Headline CPI was at least a touch lower at 10.5% year-on-year (from 10.7% and a peak of 11.1%), helped by reduced petrol prices, but there is still plenty of inflation in areas such as food and leisure. The battle between lower goods prices and higher services prices looks set to continue, and, of course, there are a lot wage battles ahead in the public sector. And workers have a tight labour market on their side. Unemployment at 3.7% remains close to the cycle low of 3.5%. The trouble, though, is that wage growth of 6.4% remains well behind inflation. Perhaps, then, a good reason for a 1.1% month-on-month fall in Retail Sales volumes in December, leaving them 6.1% below the level a year previously. What is a central bank to do? For now, push on with defeating inflation, with the market marginally pricing in a 0.5% increase on 2 February. That would take us to 4%.

December Retail Sales were weak in the US too, falling 1.1% from November. It’s possible that the icy weather bomb was to blame, and so we might have to wait for the next release to see the true picture. Even so, the market saw this as an omen of weaker consumer behaviour to come. Weak Industrial Production also sent shivers through the market, with the 0.7% month-on-month decline a lot worse than the expected -0.1%. And that was off a lower base, with November’s figure revised down from -0.2% to -0.6%. More positively, from a cost perspective, Producer Prices continue to fall back, now running at a core rate of +4.6% year-on-year. This series peaked at +7.1% last March.

Survey data appears to have turned a corner in Europe as fears of a deep, energy price-led recession recede. The ZEW economic outlook survey perked up from -23.6 to +16.7, having been -60 at the beginning of Q4. But the latest Consumer Confidence survey was a bit disappointing. While it recovered from -22 to -20.9 (vs a recent trough of -28), that was not as good as hoped for (-20). The European Central Bank’s message remains that it is full steam ahead in terms of rate rises, and maybe unsurprisingly with headline inflation still at 9.2% and the core rate at 5.2%. The ECB will also unveil its next move on 2 February, and the market expects to see another 0.5% rise in the deposit rate, taking it to 2.5%.

Finally, some better-than-expected data to report. GDP rose 3% in Q4, ahead of an expected 2.7%. That’s hardly great by past Chinese standards, but could mark the bottom now that the zero-Covid policy has been abandoned. Year-on-year Retail Sales growth in December was -1.8% against a forecast -9%, suggesting some release of pent-up demand, with, one might expect, more to come. GDP growth expectations for 2023 are being revised up again, with estimates above 5% not uncommon.