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UK in Focus: Is good news, bad news?

19 Apr 2024

Key takeaways

  • UK GDP is on track to meet our 0.4% q-o-q forecast in Q1.
  • Downtrend in wage growth and unfilled vacancies stalls, while services inflation surprised to the upside ...
  • ... raising the risk that ‘good’ economic data is ‘bad’ news for interest rate cuts.

UK data review (Jan/Feb 2024)

GDP rose 0.1%m-o-m in February following an upward revision to thegrowthratein January to 0.3% from 0.2%m-o-m. The manufacturing sector was the star performer, rising 1.2%m-o-m led by car production which was reported to have had its strongest February in over 20-years. Notably, the tentative recovery in manufacturing seems to bedriven by business demand rather than consumers. Consumer facing services werealso weak, -0.1%m-o-m,with sharp falls in accommodation and food & beverage services. Nonetheless, the UK economy is on track to grow 0.4% in the first quarter of 2024.

UK Labour Market for the three months to February was mixed. The jobs data was weak with employment falling 156k and the unemployment rate rising to 4.2% from 3.9%. However, the rate of inactivity –those not looking forwork –rose to 22.2%, its highest rate since 2015 and vacancies stabilised, rising slightly +6k in March. On pay, total pay growth surprised to the upside remaining unchanged at 5.6% 3m/yr versus expectations of a fall to 5.5%. Meanwhile, 3m/3m annualised regular pay, a better measure of underlying momentum, rose to 4.8%, well above the likely comfort zone of around 3.5% for the Bank of England.

CPI inflation fell to 3.2% y-o-y in Marchfrom 3.4% in the prior month.The slowdown was largely driven by softer goods price inflation across food, clothing, and households goods. More concerningly, the moderation in services prices was more muted, falling to 6%y-o-y in March from 6.1% in the month prior indicating a degree of price stickiness remains. As such, core inflation –that excludes food and energy –fell to 4.2% from 4.5% previously. Looking ahead, the rate of inflation in April is expected to slow sharply to near 2%, in line with the Bank of England’s target, although, in the near term, services price growth is expected to remain too high for inflation to remain at 2% sustainably.

Housing Market RICS survey signalled further expansion in Marchwith both demand and supply showing higher activity. However, with mortgage rates a touch higher on the month, agreed sales struggled and overall house prices dipped slightly in March, the Nationwide and Halifax indices fell, 0.2% and 1.0%m-o-mrespectively. Nonetheless, we expect house prices to rise modestly this year as buyers and sellers return to the market. 

Non-UK nationals in the labour force

Immigration is a hot topic in politics...

Immigration is once again top of mind for many voters around the worldas they head to the polls in this record year for elections. But immigration is not just a highly charged social and political issue, it is also a big macroeconomic one, not least because population projections look awful across much of the world. That matters for potential economic growth –which is driven by people and productivity –and not just over the long term.

During the pandemic and since, the degree and type of immigration hasimpacted significantly on the growth-inflation trade off in many advanced economies, especially the US and UK, so it also has a role to play in determining the labour market outcomes and hence the timing and magnitude of interest rate cuts in 2024-25. 

... UK labour force has been reliant on migrant workers...

Accordingto the ONS, all of the net increase in jobs created in the UK since the onset of the pandemic have been filled by non-EU or UK nationals. Since 2019, on a net basis over 900k non-UK nationals were employed compared to a net fall of half a million UK nationals. Its worth noting that some caution should be taken when inferring these numbers due to issues surrounding their source. However, they are also in line with the data on visa applications, with over 1million skilled-workvisas being grantedsince 2019,and workforce jobsthat showsthat the healthcare sector was responsible for more than 40% of the jobs gained in the UK in 2023.Agriculture, education and finance were the next biggest sectorsfor employment growth.

Source: ONS, Macrobond

Higher wage costs place greater focus on productivity

... although that may become harder going forward

... although thatWith more non-UK skilled workers joining the UK workforce last year than ever before, we may think that the labour supply and wage challenge would be going someway to being resolved. However, the level of inactivity in the UK has risen by over 700k over the same period, since 2019, of which the vast majority are reporting as suffering from long-term sickness.Therefore, the prospect of a swathe of possible workers returning to the workforce to meet any uptick in demand this year seems unlikely.   

Moreover, the minimum salary threshold for foreign workers hasrisenby nearly 50%in April 2024,potentially reducing the ability of firms to rely on overseas workers to fill roles. As such there is a risk that hiring difficulties become more entrenched adding to near-term wage pressures and possibly inflation persistence. Over the longer-term, surging unit labour costs raisequestions as to where UK economic growth will come from without stoking inflation, increasingfocus on the need to reviveUK investment and productivity growth.

Related Insights

With inflation no longer surprising on the downside…[12 Mar]
While activity indicators appear to be improving after the UK fell into recession last year...[8 Mar]
Markets are watching data closely for any signs of rate cut timing and magnitude in the…[4 Mar]

Disclosure appendix

Additional disclosures

1. This report is dated as at 19 April 2024.

2. All market data included in this report are dated as at close 17 April 2024, unless a different date and/or a specific time of day is indicated in the report. 

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