Economic Highlights

GDP fell 0.1% in October against expectations of a 0.1% increase. It could be that some of that shortfall was down to consumers and businesses pulling in their horns before the Budget, but there was also evidence that some transactions were brought forward to head off possible tax changes and so it was probably a wash in the end, meaning that the economy is just weak. Evidence for that can be seen in the fact that there has only been one positive month of growth in the last five reported. It may well be that the lagged effect of higher interest rates is feeding through. The final S&P Global PMI survey of the year made a similar case, with the Composite reading of 50.5 indicating sluggish growth at best. The Bank of England’s Monetary Policy committee must be sorely tempted to cut interest rates this week, although the market’s opinion is that its hands remain tied by inflation still being well above target and with progress on reducing it having stalled.

The US Federal Reserve also meets to decide its interest rate policy this week and already has November’s inflation report under its belt. Inflation is proving to be a bit sticky in the States too, with November’s headline CPI coming in at 2.7% as expected with the core rate at 3.3%, also in line. Those numbers were enough to convince traders that the Fed would follow through on its intent to keep cutting rates this month. However, the Producer Price Indices gave some reason to suggest that policy might be somewhat less expansive as we head into 2025, as both the headline (+3%) and core (+3.4%) readings came in hotter than forecast. The December S&P Global PMI survey reflected rising animal spirits following the election, with the Composite reading rising from 54.9 to 56.6 thanks to a big jump in the services component from 56.1 to 58.5.

The European Central Bank cut interest rates by 0.25% as expected to 3%. In the process it dropped some of its more hawkish rhetoric around inflation risks, opening the way for further cuts in 2025 (which the market was already betting on). Indeed, while the market remains uncertain about the pace and scope of rate cuts in the UK and US, it sees rates below 2% by the end of 2025. That is something of a reflection of the weakness in the core countries of Germany and France. Even so, the latest HCOB PMI survey failed to live up to the gloomiest expectations. Helped by a jump in services from 49.5 to 51.4, the composite reading ticked up from 48.3 to 49.5, although that still signals overall economic contraction.

The monthly data from China offered another disappointing set of numbers for November. Whilst Industrial Production (+5.4%) and Fixed Asset Investment (+3.3%) were broadly as expected, Retail Sales (+3% year-on-year) were well below the consensus forecast (+5%). Residential Property Sales (-20%) and the unemployment rate (5.0%) were much the same as in October. In the “clinging on to straws” department, new home prices fell by just 0.2%, which was the smallest decrease in 17 months, while second-hand home prices fell 0.35%, which was the least since May 2023. Equity markets reacted by falling in China and Hong Kong, with concerns about growth outweighing hopes for more stimulus.