Economic Highlights

Recession is an emotive word. Whether the UK is in one is debatable; that the economy is very sluggish is not. Growth of 0.0% was the headline figure for Q3, but that was rounded up from -0.02% (or the equivalent of a measly £173m). Still, it beat the consensus expectation of -0.1%, and growth in September was a heady 0.2% over August. Consumer spending saw the first fall (-0.4% quarter-on-quarter since Q4 2022, suggesting that higher interest rates are biting, and residential investment was also weak (-1.7% quarter-on-quarter). A fall in business investment (-4.2%) might have been a function of demand having pulled forward into Q2, ahead of the expiration of the super-deduction tax break. A falling trade deficit (exports rising and imports falling) was beneficial to growth. No doubt the Bank of England would like to cut rates, were it not for the fact that inflation remains well above target.

The latest Senior Loan Officers’ Opinion Survey confirmed that bank lending standards in the US remain tighter, although the balance was slightly lower than in July’s report. There has not been an appreciable increase of caution since the bank bankruptcies in March, which is a relief, and that has contributed to the better-than-expected economic performance. But neither are aggregate bank loans growing yet, which will continue to hold back growth. Consumers on average remain downbeat, with the latest University of Michigan Sentiment Survey reading dropping from 63.8 to 60.4 against an expected 63.7, with both the current and expected readings falling. Inflation expectations also rose, from 4.2% to 4.4% on the one-year horizon, and from 3% to 3.2% on the five to 10-year view, both of which reading exceeded forecasts, possibly driven by concerns about higher fuel prices given events in the Middle East, even though fuel prices have not risen.

Falling Producer Prices are (one would hope) a harbinger of lower inflation. The Eurozone Producer Price Index is now running at -12.4% year-on-year. There is little doubt that Europe is struggling to grow that the moment. The latest Retail Sales print (for September) showed a contraction in sales of -2.9%. Even so, there are no signs of potential leniency from the European Central Bank yet, with most communications still emphasising the need to ensure that inflation is properly conquered.

China fell back into deflation in October, with the headline Consumer Price Index reading -0.2% year-on-year. One might have thought that the fact that the greatest influence on inflation at the moment is falling pork prices (-30% year-on-year) would be taken positively, as it eases the strain on consumers’ finances. Instead, there seems to be more concern about the optics of deflation and how that reflects on overall consumer confidence (which is, to be fair, very weak). Core CPI (which excludes food and energy) fell from 0.8% to 0.6% year-on-year. If this persuades the government to boost its stimulus, so much the better, at least as long as it is well constructed and targeted.