Economic Highlights

The latest monthly update on the UK’s public finances put borrowing in December at £27.4bn on the PSNBx measure, blasting past consensus expectations for a £17.8bn rise. As now seems typical, there were once again downward revisions to the back data, with PSNBx for the financial year to November 2022 downgraded by £4.6bn to £94.2bn, drawing some of the sting. The surge in borrowing, marking the highest December figure since records began, was largely due to a sharp increase in debt interest expenditure as well as spending on the various energy support schemes. With much of the government’s index-linked debt uplifted by RPI inflation with a two-month lag, the 14.2% peak in RPI inflation in October caused government interest payments to surge to £17.3bn, the second largest recorded in any single month. This PSNBx report not only surged past consensus expectations, but was also £9.8bn higher than the Office for Budget Responsibility's own forecast, which the Office of National Statistics has attributed to student loan assumptions. These reports reduce such headroom and squeeze the fiscal opportunities for the Chancellor.

The first release of US Q4 GDP, came in at +2.9% (quarter-on-quarter annualised return), marginally better than expected (2.6%). This put annual 2022 GDP growth at 2.1%. Although the Q4 number may appear to show a relatively robust rate of growth, the components of the release tell a more nuanced picture. Indeed, a key driver of the print was an inventory swing, contributing 1.46% points to the Q4 figure. When looking at final domestic demand, this was once again disappointing. It expanded by only 0.8% annualised on the quarter, or 1.0% on the year in Q4, a far weaker print than is typical. Within this, private investment contracted for the third consecutive quarter, unsurprising in a higher interest rate environment. Policymakers will take a close look at these final demand numbers, supporting the cause of those on the Federal Open Market Committee advocating for a smaller 25bps hike at this week's meeting. The extremely tight and resilient labour market has been a key sticking point to easing the pace of tightening, owing to fears of a wage-price spiral.

Eurozone flash PMIs rebounded in January, echoing recent signals from other indicators such as the ZEW, Ifo, and Sentix surveys that conditions are improving. The Composite PMI unexpectedly returned to expansionary territory of 50.2 following a 0.9 point increase in the services index (which crossed back above the boom-bust line to 50.7) and a one point rise in the manufacturing index (which at 48.8 remains in contraction). In particular, Germany’s services PMI and France’s manufacturing index both experienced larger-than-anticipated increases and returned to expansion. There was some cheering when Spain reported Q4 GDP growth of 0.2% quarter-on-quarter (forecast +0.1%) and +2.7% year-on-year (forecast +2.2%), with Q3 year-on-year growth revised up from 4.4% to 4.8%. But then January’s headline inflation print came in at +5.8% year-on-year (forecast +5%), with core inflation rising from 7% to 7.5%. Given that Germany’s Q4 GDP undershot expectations by falling 0.2%, there will be some head scratching at the ECB ahead of this week’s meeting, such are the difficulties of running “one size fits all” monetary policy across the eurozone.

No official data last week owing to the Lunar New Year holiday, but plenty of other snippets. Travel and tourism spending rebounded strongly during the holiday, with trips taken rising 23% to 308m, reaching 88.6% of the pre-COVID level in 2019. And so still a bit more recovery to come post full re-opening. Hearteningly, China reported a sharp drop in new Covid-related deaths during the holiday week, even as the spike in travel increased the likelihood of more infections across the country. Having said that, the Financial Times carried a story about rising demand for chrysanthemums, traditionally a flower associated with funerals and periods of mourning. Finally, the government, via state broadcaster CCTV, said that it would promote a consumption recovery as the major driver of the economy and also boost imports.