Economic Highlights

It was a mixed week for UK economic data. On a positive note, inflation undershot expectations, coming in at a headline rate of 2.5% (vs a forecast of 2.6%) with the core rate at 3.2% (vs 3.4% expected). However, a 25% drop in air fares (owing to the timing of the data gathering) might have been a bit flattering, and we also have utility price increases ahead in April. It still feels as though inflation is not going to hit the 2% target on a sustainable basis soon. November’s GDP growth of 0.1% was below the expected 0.2% and points towards a flat quarter. This was emphasised by a weaker-than-forecast retail sales print for December (-0.6% vs November). All this helped to provide some support to the bond market, with the 10-year Gilt yield falling to 4.66% having recently been as high as 4.9%. The futures market has now priced in almost fully a 0.25% base rate cut from the Bank of England at February’s meeting.

There was also a positive inflation surprise in the US. Although the headline annual rate came in at 2.9%, the market reacted well – too well? – to an unexpected fall of 0.1% to 3.3% for the core rate. These numbers are consistent with the Federal Reserve’s preferred PCE inflation rate coming in at 2.6%. But that’s a long way still from the 2% target and the US economy continues to run strongly. The Atlanta Fed’s GDP Now estimate for Q4’24 stands at 3% annualised growth. That means that Fed rate cuts are off the table, in terms of market expectations, until July at the earliest.

The final headline Consumer Price Index for the euro zone came in at 2.4%, with the core reading at 2.7%. That seems a bit too high for comfort too, but almost any ECB official who speaks publicly seems to be committed to more rate cuts, taking the view that weak economic activity (especially in the French and especially German core) and prospective lower inflation provide the justification. Market pricing suggests further quarter-point cuts in January and March and possibly April too.

GDP growth of 5.4% in the fourth quarter of 2024 relative to 2023 smashed the 5% consensus forecast, while the annual growth rate of 5% also beat the 4.9% expectation, with manufacturing and industrial production leading the way. It could well be that this was a function of increased activity to get ahead of potential US tariffs. In any event, most people remain sceptical of the reported growth figure. The Li Keqiang Index, named after the late Premier, who thought that referencing bank loans, electricity production and rail freight might give a more accurate estimate of activity, suggests just under 4%. An article in Financial Times last week cited an economist at a state-owned brokerage who suggested that growth had been closer to 2% in recent years. He has since been banned from public speaking and is being audited by financial authorities. Still, even if the base is lower, and that will have been reflected in the results of companies who are reliant on China for their trade, there is still an opportunity for recovery should the right policies be applied. We are still waiting to see them.