- CPI inflation has fallen sharply from a peak of 11.1% in October 2022 to 4.6% in October 2023, albeit still well above the Bank of England’s 2% target. The latest Treasury-compiled consensus forecast (November) is for CPI to stand at 2.5% by Q4 2024. Wage inflation remains stubbornly high at 7.7% (excluding bonuses), and global energy prices are clearly vulnerable to geopolitical shocks and unpredictable global demand, so there are considerable risks to this outlook.
- The Bank of England’s Monetary Policy Committee (MPC) has held rates at 5.25% for two consecutive meetings, and the proportion of MPC members voting for an increase has fallen from four out of nine members in October to three out of nine in November. Given falling inflation, weak output growth, and subdued readings in recent business and consumer sentiment surveys, the base rate has probably now peaked. However, continued strong wage growth and other inflationary pressures mean that the base rate will also be slow to come down and the first reduction may not occur until well into 2024.
- High inflation has increased tax revenues, allowing some headline tax cutting measures in November’s Autumn Statement, including a 2% reduction in National Insurance Contributions. However, these tax cuts are relatively small compared with the increase in the overall tax burden in recent years.
- The unemployment rate remained at 4.2% in the three months to September and job vacancies fell for the 16th consecutive period, but remain elevated compared with pre-pandemic levels. These numbers suggest a continued tight, albeit weakening labour market. Consensus forecasts suggest a further modest rise in the unemployment rate to 4.6% by Q4 2024.
- The latest consensus view projects UK output growth at just 0.5% for 2023 and 0.4% in 2024, although November’s Office for Budget Responsibility (OBR) assessment for 2024 was somewhat more optimistic at 0.7%. All three S&P Global / CIPS PMI surveys (manufacturing, services, and construction) remain below the 50 mark (therefore indicating contraction). Given this weak outlook, there may well be one or more quarters of falling economic output over the next year.
- In its November report, the OBR downwardly revised its medium term estimate of the UK’s medium-term potential economic growth rate from 1.8% to 1.6% per annum. This was largely driven by a weaker forecast for average hours per worker (due to a greater proportion of younger and older age groups in the workforce, who tend to work shorter hours).
RECENT OUTPUT TRENDS
- Recent ONS revisions now show the UK economy to have recovered from the pandemic more rapidly than previously thought, and output was 1.8% above its pre-pandemic peak by mid-2023. Upward revisions provide a slightly more upbeat picture of the first half of 2023, with Q1 and 2 seeing output growth of +0.3% and +0.2% respectively.
- However, the preliminary estimate for Q3 2023 shows zero growth. There was a 0.1% fall in the services sector which was offset by an equivalent increase of 0.1% in construction this quarter, while production output was broadly flat.
- Looking at monthly output growth and GDP rose by 0.2% in September, up from (a revised) 0.1% in August.
- The S&P Global/CIPS UK Manufacturing PMI rose only very slightly in October, moving to 44.8 from September’s 44.3 (still below the ‘50’ mark and therefore indicating contraction). Production declined for the eighth consecutive month while new orders fell for the seventh month in a row. Once again purchase prices declined which helped reduce the costs of materials, although selling prices also decreased, for the fourth month in the last five. Consumer uncertainty surrounding the economy, and the cost-of-living crisis generally, helped contribute to falling business optimism, which is at its lowest point in ten months.
- Meanwhile the UK Services PMI also moved marginally upwards to 49.5 in October, from 49.3 in September. This is now the third consecutive month where the figure has been below the ‘50’ expansion threshold. There was again subdued consumer demand with cost-of-living pressures and rising interest rates cited as exerting the most downward pressure. Job cuts in the sector continued while new orders fell, and the level of business optimism was the lowest it has been all year.
- As with the two other PMIs, the UK Construction PMI rose only very slightly in October, up 0.6 points over the previous month, to 45.6. This still marks the second lowest reading since May 2020, with housebuilding in particular showing clear signs of contraction amidst a lack of demand and cutbacks to new projects as a result. Civil engineering work also fell, at the sharpest rate since July 2022, while commercial work showed stabilisation on the month.
- The unemployment rate was unchanged in July-September at 4.2%, having risen from a low of 3.5% in 2022. Overall employment figures show a decrease of 0.1 percentage points this quarter, to 75.7%, although this marks no change from last month.
- The number of payrolled employees rose by 33,000 in October, to 30.2 million, while the number of job vacancies fell by 58,000 in the three months to October. This is the 16th consecutive reading of falling job vacancies and the figure is down 5.7% from the previous quarter. Overall, the data suggests that the labour market is weakening a little, but labour supply remains tight.
- Annual average earnings growth was 7.7% (three months to September). This is down slightly from 7.8% per annum the month before but is still amongst the highest annual growth rates since records began. Annual growth for the public sector was estimated as 7.3%, marking the highest-ever rate for this sector, while the private sector posted 7.8%.
- The pace of annual inflation slowed sharply in October 2023 to 4.6%, down from 6.7% the month before and well below the peak of 11.1% in October 2022. This marks the slowest rate of inflation since October 2021 with the largest downward contribution coming from a fall in energy prices due to Ofgem lowering the cap on household bills. The cost of housing and utilities, including gas and electricity, fell by the most since January 1989.
- Core CPI (excluding volatile elements such as energy and food) rose by 5.7% in the 12 months to October 2023, down from 6.1% in September, but still above all-items CPI.
- The latest consensus view (November) is for annual headline CPI to fall to 2.5% by Q4 2024. In its November report, the Office for Budget Responsibility now expects CPI to take until the Q2 2025 to return to the 2% target. Clearly, there is a high degree of uncertainty surrounding this outlook, with external factors such as the conflict in the Middle East having the potential to impact on global energy prices and consequently inflation in the UK.
- The Bank of England’s Monetary Policy Committee (MPC) held interest rates again at 5.25% in November, unchanged for the second consecutive meeting, following 14 consecutive decisions to increase Bank Rate.
- Given the recent sharp fall in inflation, together with the UK’s very weak economic growth, September’s base rate rise may have been the last in the current cycle. But with inflation still well above the Bank of England’s 2% target, core inflation at 5.7%, and the volatility of global energy and commodity prices, a further rate rise remains plausible. The MPC will want to make sure that inflation does not reignite. Therefore, given the plethora of inflationary pressures, the first reduction may not be until well into 2024. The next announcement from the MPC is scheduled for 14th December.