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UK in Focus: Watching the labour market
HSBC recently cut its UK GDP growth forecasts to 0.4% in 2023 but does not expect a recession or housing market crash. It also expects no further rate rises, after inflation fell and the BoE held rates steady for the first time since November 2021
UK data review (Jul/Aug 2023)
- GDP fell by 0.5% m-o-m in July, reversing the 0.5% increase seen in June, and continuing the pattern of ‘one step forward, one step back’ that has characterised UK monthly GDP growth for the last couple of years. All three main sectors fell in m-o-m terms: services output was down 0.5% m-o-m (on the back of strikes in health services), industrial production by 0.7%, and construction by 0.5%.
- Wage growth surprised to the upside once again, with total pay rising by 8.5% 3m/yr (consensus: 8.2%) in July and being revised up from 8.2% to 8.4% for the previous month. The July rate was the fastest on record (in this series dating back to 2001). Within this, pay growth slowed a touch in the private sector (from 7.8% to 7.6% 3m/yr), but rose in the public sector from 10.7% to 12.2% 3m/yr, on the back of a sizeable NHS pay settlement. At the same time though, the unemployment rate rose further, from 4.2% to 4.3%, and vacancies fell for the 15th consecutive month.
- August inflation threw up a big downside surprise with headline CPI inflation dropping from 6.8% to 6.7% y-o-y (consensus 7.0%), despite a jump in petrol prices.The downside news was driven by a much sharper-than-expected drop in core inflation, falling from 6.9% to 6.2% y-o-y (consensus 6.8%), on lower food, restaurants and hotels, furniture, and recreation and culture prices. This meant that there were declines in both core goods and services inflation. Against this backdrop, the Bank of England (BoE) opted to keep the bank rate unchanged at 5.25% on 21 September, versus earlier expectations for a further 15bp increase.
- Retail sales made only a very meagre recovery in August, with volumes rising 0.4% m-o-m (consensus: 0.5%). Excluding fuel, volumes were up 0.6% (consensus: 0.7%). That increase came from food and non-food stores, which saw a partial recovery after wet weather kept shoppers away in July. But nonstore retail and fuel sales fell, with the latter perhaps reflecting higher prices.
- PMIs (Sep) remained below 50 in September, with the manufacturing print rising a touch, from 43.0 to 44.2 (consensus: 43.2) and the services survey falling from 49.5 to a 32-month low of 47.2 (consensus: 49.4). For the all-important service sector, the breakdown is worrying: the employment index fell by five points to its lowest level since January 2021. And new orders and business expectations were at their weakest since November 2022.
Watching the labour market: Feeling the pinch from higher inflation and interest rates
The UK economy has shown considerable resilience to the numerous challenges it has been through, but the cracks are now starting to show. The services PMI has been below 50 in the last two readings, the housing market numbers are weakening, and unemployment is starting to rise. We may be witnessing a summer shakeout, but it is also possible that the economy is now faltering in the face of higher inflation and interest rates.
Lower forecasts: GDP growth forecasts down to 0.4% in 2023, 0.5% in 2024
In slightly better news for the UK, the Office for National Statistics (ONS) has announced that, following methodological revisions, it now thinks the economy was around 2% bigger at the end of 2021 than previously estimated. This chimes with the strong jobs market and tax revenue picture of the last couple of years. However, HSBC economists recently revised down their Q3 2023 GDP growth forecasts from 0.3% q-o-q to 0.0%, partly because of near-term data news – with GDP having fallen 0.5% m-o-m in July. That takes 0.2ppt off 2023 growth and 0.1ppt off 2024 growth.
They also made further downward tweaks, for two reasons: first, the weakness in the surveys of late, and second, because the post-pandemic catch-up potential, which had underpinned previous forecasts, has now been revised away. So, HSBC is now forecasting GDP growth of 0.4% in 2023 (previously: 0.6%), 0.5% in 2024 (previously: 0.8%), and 0.9% in 2025 (no previous forecast). While this is below the trend rate of growth, it does not incorporate a recession, reflecting a recovery in real incomes as inflation falls back. The team forecasts CPI inflation dropping to 4.1% at end-2023, 3.3% at end-2024, and 2.2% at end-2025, and thinks companies are more insulated from higher interest rates than in previous cycles.
Peak rates: HSBC do not expect rate cuts until 2025
These forecasts assume no further rate rises from the Bank of England (BoE), which held rates unchanged at 5.25% on 21 September. But it should also mean no recession, no housing market crash, and no rate cuts in 2024, as resilient (if not strong) demand keeps core inflation and wage growth higher than the BoE would like. However, as inflation falls back, real interest rates will become more restrictive and the BoE will start to think about cutting. We might see the first move towards the end of 2024, but election uncertainty might keep the BoE on hold until the start of 2025. So, HSBC has pencilled in 25bp of easing per quarter in 2025, taking the bank rate to 4.25% by end-2025.
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