Economic Highlights

There has been plenty of data since we last communicated, and the UK’s economic health remains mixed at best, with the Bank of England trapped between a rock (sluggish growth) and a hard place (aggravatingly sticky inflation). The final reading for GDP growth in the third quarter was downgraded from 0.1% to zero, although an unexpected reduction in government spending could yet be reversed in future. A drop in mortgage approvals in November (to 65.7k from 68.1k in October) suggests that the recent increase in bond yields and mortgage rates has slowed the housing market again. The latest S&P Global Composite PMI reading of 50.4 shows the economy to be finely balanced on a knife-edge. But with the latest core Consumer Price Index reading coming in at 2.6% for November (up from 2.3% in October), the Bank of England felt compelled to leave the base rate unchanged at 4.75% at December’s meeting. However, the decision was interpreted by traders to be a “dovish hold” following comments from Governor Bailey and the fact that there were 3 committee members who did vote for a cut vs 6 to stand pat.

The latest Federal Reserve meeting, in contrast to the BofE’s, was taken as a “hawkish cut”, as the FOMC reduced rates by another 0.25% while reducing the odds of deeper cuts in 2025. Indeed, its Dot Plot now only sees two quarter-point cuts being made this year (vs four as recently as September 2024). The Fed’s hands are tied by sticky inflation too, as well as by a much stronger economy, with Q4 GDP growth expected to come in at around 2.5% on an annualised basis. Then there is the Trump factor to contend with, with his broad policy thrust regarded as being potentially inflationary. A survey of economists conducted by Bloomberg sees only a 20% probability of a recession developing in the US 2025, down from 50% a year ago.

There is nothing holding back the European Central Bank. It cut its deposit rate by another 0.25% in December and is fully expected to repeat the cuts at its January and March meetings, taking the rate to 2.5%. Growth remains sluggish in its core German and French economies, with the former country building towards federal elections in February following the collapse of the ruling coalition late in 2024. France is also in a political mess, with President Macron’s snap election call last summer proving to have been a failed gamble on cementing his power. Even so, it is unlikely that he will fail to see out his term as President, which ends in 2027.
 

The continuing descent of China’s 10-year bond yield (now at 1.59%, down from 2.5% a year ago) is testament to the country’s inability to escape the economic constraints of high levels of debt and a persistent lack of consumer confidence. For example, Retail Sales growth in November was just 3% year-on-year vs an expected 5%. The Yuan continues to devalue as traders see China being most vulnerable to President-elect Trump’s tariff wars. Since late September, which coincides with Trump’s resurgence in opinion polls, the yuan has fallen from 7.02 vs the dollar to 7.32. Investors are also waiting for more stimulus measures to be announced, although might well have to wait until China knows exactly where it is on trade with the US.