Economic Highlights

Household deposits rose by £8.4bn in January, well above the recent average, suggesting that consumers are back in saving mode as they contemplate a weaker economic environment. Conversely, a £1.7bn rise in consumer credit vs a six-month average of £1.1bn, the biggest monthly increase since last January, tells a slightly different story. Could it be that there is also a large cohort who are only getting by with more borrowing? Mortgage Approvals dipped from 66.5k to 66.2k, which was a slight surprise as there was expected to be more demand in the run-up to Stamp Duty concessions being reduced in April. That might have been because the average mortgage rate ticked up for the first time in five months (although it should have since declined with bond yields coming down from their recent peak). The Bank of England remains caught between weak activity and persistently high inflation, with rising food prices being the latest problem, even if the causes of that are not in its control.

There was a mixed bag of inflation readings. The revisions to the Q4’24 GDP data included an increase in the Core PCE Price Index from 2.5% to 2.7%. But then the figure for January came in at an annual rate of 2.6%, which calmed nerves to some degree. Next up was the Prices Paid element of the ISM Manufacturing survey, which saw the reading jump from 54.9 to 62.4, suggesting higher inflation in the pipeline. At the same time there were drops in the New Orders index from 55.1 to 48.6 and the Employment index from 50.3 to 47.6. It definitely looks as though the US economy has entered a softer patch, although we believe it is just that and not the precursor of a more serious downturn. The market’s reaction has been to accelerate its expectations for interest rate cuts. The December future now suggests a rate of 3.6% vs 4% a month ago vs the current effective rate of 4.33%.

The latest CPI figures left the door wide open for the ECB to continue to cut interest rates at this week’s meeting. The headline rate fell from 2.5% to 2.4% in February, with the core rate falling from 2.7% to 2.6%. However, there is much more excitement about the prospect of Germany throwing off its fiscal shackles. The latest news sees the incoming Chancellor, Friedrich Merz, proposing material changes to the “debt brake”, including a €500bn special purpose vehicle for infrastructure investment and an exemption for increased spending on Defence. The net borrowing cap for federal states would also be raised from 0% to 0.35% of GDP. This is all still needs to get through parliament, and so is not a certainty, but it illustrates a long-overdue shift in mindset by the German government in favour of more stimulative policies.

The National Party Congress has delivered an unchanged 5% GDP growth target for 2025 as expected and raised its fiscal deficit target from 3% of GDP to 4%, again largely as expected. There are also details of loan facilities for local governments and more capital for banks, but those measures are more shuffling of debt than pure stimulus. We note that the inflation target is reduced from 3% to 2%, which is more realistic in light of last year’s achieved level of just 0.2%. The government definitely seems to be trying to put a floor under activity, but releasing the brake is not the same as pressing the accelerator and so hopes for a decent pick up in activity remain subdued.