Economic Highlights

The country’s finances turned out a little healthier than expected in January, running a surplus of £5.4bn. That was significantly better than the Office for Budget Responsibility’s expectation of a surplus of £0.4bn. After ten months of the 2022/23 fiscal year, cumulative borrowing is £30.6bn lower than the OBR anticipated. Falls in energy futures prices in recent months should ensure that borrowing in 2023/24 also significantly undershoots the OBR’s November forecast of £140bn. Less costly energy price subsidies and stronger income tax receipts were the main source of the undershoot. Self-assessed income tax receipts of £21.9bn recorded their highest January figure since records began in April 1999. There is hope that this outcome will give the Chancellor some scope to be more generous in the forthcoming budget. However, we are not going to count on it. The OBR is expected to downgrade its forecasts for future growth and the spectre of last September’s overly generous “mini” budget continues to haunt policymakers.

The primary cause of the latest sell-off in markets was the release of US Personal Consumption Expenditure (PCE) data on Friday, which included the Core PCE Deflator, a key measure of inflation and one closely monitored by the Federal Reserve. This rose unexpectedly by 0.6% in January from December and there was also an upward revision to December’s figure. If one were to look at annualised numbers, they are running at 4.8% over three months, 5.1% over six months and 4.7% year-on-year, which does begin to look a bit “sticky”. US interest rate expectations continued to climb following data, with the peak rate moving up to a new high of 5.40%, and that peak being pushed out from June to September. “Higher for longer”, indeed. The January 2024 rate is now firmly above 5%, almost exactly a whole 100bps higher than it was at the start of the month, and so having effectively priced out four 25bp cuts.

The flash Euro area Purchasing Manager Index survey showed a further two-point rise in the headline composite output index in February to 52.3, bringing the total rise since the October trough to 4.9 points. The new orders component, a reflection of underlying demand in the economy, also improved for the fourth consecutive month to 50.6. Supply-chain stress faded further, with the manufacturing supplier delivery times index rising to the highest level since 2009, leaving it comfortably above the long-run median. This, in turn, led price pressures to continue fading, although they remain well above their long-run medians. The PMI press release noted that, on the manufacturing side, Chemicals & Plastics and Basic Resources remained the main areas of weakness, while Food & Drink, Household Goods and Industrial Goods Manufacturing showed further signs of recovery. A key change in the services sector was the revival of growth in Financial Services activity, as well as resurgent Tourism & Recreation and Media activity.