Economic Highlights

The UK’s Public Finances took a turn for the worse in March. Although the monthly deficit of £11.9bn was smaller than a year earlier, it was still higher than expected. There were also some unhelpful revisions to past data, meaning that the annual deficit for 2023/24 is now projected to be £120.7bn (equivalent to 4.4% of GDP), some £6.6bn higher than the Office for Budget Responsibility’s last forecast delivered with the Spring Budget. With the latest 2p reduction in National Insurance contributions now kicking in, there will be even less scope for Chancellor Jeremy Hunt to pull the NI rabbit out of the hat again ahead of the approaching General Election. There is also the rising burden of UK debt for investors to contend with, with the Debt Management Office (DMO) planning to sell £277.7bn of Gilts in the current fiscal year. The DMO will not want to see further slippage in the country’s financial position.

It was Thursday’s US Q1 GDP data which hogged the headlines last week, with growth coming in well below expectations and inflation running hotter than forecast. The difference between the expected growth rate of 2.5% and the outcome of 1.6% looks like something of a chasm, but, as we have commented before with respect to this series, the deviations from expectations can be exaggerated by the fact that the data is reported on an annualised basis. Thus, if you divide everything by four, growth of 0.4% against an expected 0.625% doesn’t look quite as puny. Furthermore, potentially erratic items including net exports and movements in inventories detracted from the headline GDP figure, leaving final sales growth to domestic purchasers at a healthier 2.8%. In any event the US continues to show most of the rest of the developed world a clean pair of heels in terms of growth, not least because it continues to run a fiscal deficit north of 6%. As for the inflation “scare”, the Core PCE Price Index of 3.7%, up from 2% in Q4 2023, came as a bit of a shock, but was somewhat mitigated by the PCE Core Deflator for March that was reported on Friday, which came in at +0.3% month-on-month as forecast, and at 2.8% year-on-year. This helped to take some of the sting out of the movement in bond prices, with the US 10-year yield only up 1 basis point over the week to close at 4.66%.

Flash PMIs for April added to the signs that the eurozone economy is bottoming out, as the composite index improved to 51.4 to reach an 11-month high. The upturn was mostly driven by a bounce in services. Meanwhile, the recovery in manufacturing is lagging. April’s PMIs match signals from other surveys, suggesting that growth in the eurozone is finally starting to pick up, if tentatively for now. Of the two largest eurozone economies, Germany’s economic upturn seems particularly strong, with services showing a decent recovery and manufacturing improving for the first time since the beginning of the year. This pushed the composite index into expansionary territory for the first time in nearly a year. In France, PMIs suggest the economy is on a gradual rebound path, although, once again, it was services growth to the fore. Price pressures remain substantial, owing mostly to wage increases. The increase in output prices remains above its long-term average, although this does not seem to be deterring the European Central Bank (ECB) from planning an interest rate cut in June.

China’s industrial profits fell -3.5% year-on-year in March, leaving profits for the first quarter in aggregate 4.3% higher than in 2023. That is significantly down from the +10.2% year-on-year growth that was reported for the combined January and February period covering the Lunar New Year. This data points to the continuing challenges China faces in boosting its growth rate in the face of manufacturing oversupply, consumers lacking confidence and the ongoing deflation of the real estate bubble.