Economic Highlights

It was a dramatic week in the UK, headlined by the Bank of England raising the Base Rate by 0.5% to 5%, a level last seen in 2008. This came hot on the heels of yet another unexpectedly high inflation print, with the headline Consumer Price Index showing an annual gain of 8.7% in May, unchanged from April’s reading. The crucial core reading ticked up from 6.8% to 7.1%. The soon-to-be-retired Retail Price Index registered a gain of 11.3%, which is handy for benefits claimants, but not great for costs like your mobile phone bill. With interest rates pushing up mortgage rates, there is no real leeway for the government to provide support even if it was minded to: the country’s national debt-to-GDP ratio topped 100% for the first time since 1961. A 0.3% monthly rise in retail sales in May suggests that consumers are not down and out yet, and there was even a surprising rise in the GfK Consumer Confidence Index (from -27 to -24). However, there is likely to be more misery ahead of us as disposable incomes are squeezed. The latest round of Purchasing Manager surveys were more downbeat.

One, perhaps surprising, pocket of health in the US economy is housebuilding. The latest NAHB Housing Market Index rose from 50 to 55, although it’s still a long way short of last year’s 80+ peak. Housing Starts jumped from 1.34m to 1.49m, as the US makes up for a “lost decade” of new home construction following the financial crisis of 2008. May’s figure is higher than anything seen in the period from 2007 to 2020. High rates for new mortgages (7%) versus the average rate payable on existing ones (about 3.5%) are constraining activity in the “second hand” market, leaving the field open for homebuilders. Existing Home Sales are running at 4.3m per month, versus a Covid-boom run of well above 6m, and a relatively consistent 5m+, in the pre-pandemic decade. The manufacturing economy continues to struggle, with the latest PMI reading coming in at 46.3, close to last December’s cycle low of 46.2. The Conference Board’s Leading Index of economic indicators continues to track lower, registering its 14th consecutive monthly decline. The current six-month cumulative fall of 4.3%  has always been associated with recessions in data going back to 1960.

June’s Euro area PMIs registered a bigger than expected slowdown, the Composite index falling 2.5pts to 50.3, where expectations had been for a reading of 52.5. Manufacturing, which had already been suffering from a period of weakness, saw activity weaken further, the headline manufacturing PMI falling to 43.6, a 37-month low. Within that, the contraction in manufacturing output accelerated, with the PMI falling to 44.6 (from 46.4). At the same time, the service sector, which had seen solid activity of late, saw a slowdown too, with the PMI falling to 52.4 from May’s reading of 55.1. Softer demand growth sits behind the weakening in activity across both sectors, as evidenced by the softening in new business, with the new orders component of the PMI falling for the first time since January. Optimism over the year ahead also fell to its lowest level this year, with companies becoming increasingly concerned over the demand outlook, a principal component of that being worries over the impact of higher interest rates given the 400bps increase in the European Central Bank (ECB)’s key Deposit rate since last July.

The government continues to apply stimulus to the economy, although so far, in a very measured way. This is in response to the disappointing speed of the post-Covid re-opening, which was reflected in disappointing activity during last week’s Dragon Boat Day national holiday. The latest easing measures included a 0.1% cut in both the 1-year and 5-year Loan Prime Rates, intended to boost the housing market, although without returning it to a speculative state. New incentives to invest in electric vehicles were also announced, as China continues to extend its lead in EV adoption. Rumours of more aggressive stimulus abound, and low inflation would allow the sort of monetary or fiscal measures not available elsewhere.