Economic Highlights

The report for the UK labour market for July fitted into the mould of recent releases, reiterating that a gradual loss of momentum is underway. In the three months to July, employment fell by 207k, unemployment rose by 159k and the unemployment rate ticked up by 0.1%, from the previous release to 4.3%. This was much as the consensus had envisaged. In keeping with the previous trend was the further decline in vacancies (down in each of the previous 14 reports). Strong wage growth could be seen as a fly in the ointment: total average weekly earnings growth moved from an upward revised 8.4% (initially reported to be 0.2% lower than that) to 8.5%, well above the consensus forecast of 8.2%. Welcome though that might be for the individuals receiving those wage gains, these rates remain far too high relative to productivity growth for the aggregate economy, stoking fears that this could add materially to costs and thereby prolong the inflation shock. Digging deeper though, these concerns may be less applicable in this case. The main driver of this jump was the one-off payments made to the NHS and Civil Service in June and July; excluding bonuses, whole-economy wage growth was steady at 7.8% and the private-sector regular (ex-bonus) pay measure favoured by the Bank of England (BoE) saw a small dip from 8.2% to 8.1%. The BoE is expected to raise the base rate by 0.25% this week to 5.5, but we should be close to the peak now.

The latest CPI inflation reading was expected to rise again owing to base effects and rising energy prices. The headline measure rose to 3.7% year-on-year, broadly in line with consensus and higher than both the 3.2% reported in July and the 3.0% in June. This increase was driven by a 10.5% monthly rise in energy commodity prices including fuel oil. Excluding food and energy and looking at the core print, the Fed's progress on inflation is clearer, with the core measure dropping by 0.4% to 4.3%, despite the oil effect appearing within this too (air fares were up 4.9% month-on-month). But there were points of optimism from a lower inflation perspective. For example the monthly growth rate in shelter prices, which has the largest weighting in the core CPI basket, moderated once more, to +0.3% on the month, the slowest monthly pace of growth since the start of 2022. Meanwhile used car prices declined once again, by 1.2% month-on-month. There was certainly nothing in this release to force the Fed’s hand vis-à-vis interest rate policy this week, with expectations settled that it will stand pat for now while keeping its options open.

The ECB lifted its key interest rates by 0.25%, meaning that the Deposit rate now stands at 4.00%. Ahead of the decision, consensus had been pretty evenly split between no change and a 0.25% increase. Underlying the announcement was the continued assessment that inflation was expected to remain too high for too long, as framed by the updated headline inflation forecasts, which saw upgrades to 2023 and 2024, although 2025 was revised down slightly and now sits just above target at 2.1%. Core inflation projections were lowered slightly and growth forecasts significantly. However, whilst the ECB’s future policy decisions remain data dependent, the policy statement did hint at the possibility that this is the peak in rates, adding in the line that “based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”. In market parlance, this goes down as a “dovish hike”.

The latest Chinese economic data surprised to the upside, helping to lift some of the gloom about the country’s prospects. Industrial production in August, helped by robust car production, was 4.5% higher than a year earlier, up from +3.7% in July, beating consensus estimates of +3.9%. On the consumer side, retail sales were also relatively buoyant in August, rising on the year by 4.6% against growth in July of 2.5%, also above market forecasts of 3.0%. Less surprisingly, fixed asset investment continued to languish with annual growth year-to-date of 3.2%, slightly softer than July’s 3.4%. August’s equivalent figure for property investment was a decline of 8.8%. Real Estate looks set to continue to be the biggest drag on the economy as it works off excess leverage, but there are signs that consumers and manufacturers are beginning to gain a little more confidence.