Economic Highlights

The tightness of the labour market remains a concern in terms of its influence on inflation. Various indicators have pointed to a positive turning point. The KPMG/REC report on jobs added to this evidence, with the report finding that recruitment slowed sharply in August, with permanent placements falling at the sharpest pace in over three years. The report noted that firms were more cautious with hiring, as the challenging economic backdrop has dented confidence. Pay growth remains strong though, which is the main concern. According to the latest official ONS measure, private sector regular pay growth (ex-bonuses) was at 8.2% (year-on-year) in the three months to June, the highest growth rate seen outside the pandemic period, and not a rate of growth compatible with meeting the 2% inflation target. But there may be some signs of optimism ahead. The report noted that the rate of starting salary inflation in August was its joint lowest since March 2021, and pay growth for temporary workers at its second lowest since April 2021. This accords with the latest Bank of England (BoE) decision-maker panel for August. Businesses expect a sharp slowing in wage pressures, with expected year-ahead wage growth at 5.0%. For overall inflation, businesses now expect an inflation rate of 4.8% in a year's time, a 0.6%pt drop relative to the July survey. This downward trend in expectations will be welcomed by the BoE.

There were no major features in the US data last week, although a fall back in Weekly Jobless Claims continued to raise concerns that the economy is still too “hot” for the Federal Reserve’s comfort. One interesting release showed that US Household Wealth rose to an all-time high during the second quarter of this year, increasing by 3.7% to $154.3 trillion. The gains were split almost equally between equities (where US investors benefited more than most from a strong domestic market) and real estate (with great resilience shown in the housing market). There wasn’t a great amount of increased consumer debt to offset those gains, but the government continued to pile it on, with the fiscal deficit running around 8% of GDP, which is unusual, to say the least, for peacetime.

Q2 2023 GDP growth was revised down from 0.3% quarter-on-quarter to 0.1%, illustrating that regional activity remains sluggish at best. Services (as measured by the HCOB Services PMI) has joined Manufacturing in recession. This suggests that the European Central Bank will hold its deposit rate at 3.75% at this week’s meeting, as predicted by the futures market. Indeed, we could already have hit the peak for this hiking cycle.

The latest lending figures showed some recovery in August after a very weak July. There are signs that borrowers are slowly responding to incentives such as lower rates, but it’s early days to be sure if this persists. The trade picture improved from July too, with Exports -3.2% (vs -9.2%) and Imports -1.6% (vs -6.9%). Inflation snuck back into positive territory, but still only 0.1% annually against -0.3% in July. There are tentative signs of a bottoming out of activity taking place.