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No recession (yet)
Economists were convinced that Friday’s data for gross domestic product (GDP) would show Britain in recession, defined as two consecutive quarters of negative growth. Instead, the economy eked out growth of 0.1 per cent in November, rather than the expected contraction of 0.2 per cent.
Darren Morgan, director of economic statistics at the Office for National Statistics, calculated that the economy would need to contract by 0.6 per cent in December if the economy was to fall into a recession. That now seems unlikely.
However, said Paul Dales, chief UK economist, it could be a case of “recession delayed, not cancelled”.
Spending in bars and pubs during the World Cup was one of the factors boosting the economy in November. Economists watch how consumers spend as this accounts for two-thirds of GDP.
“Consumer spending has held up well in recent weeks,” said Simon French, chief economist at Panmure Gordon, who is watching to see whether consumers dip into the savings amassed during lockdown when they could not go out.
Usually in hard times, savings rise as workers fear unemployment, but French pointed to Bank of England data showing that savings fell in October and November. “For now, households are doing exactly what you want them to do to minimise a hard stop in consumer spending.”
Unlike previous recessions, Britain is entering this tricky economic period with a robust job market. The unemployment rate is at 1970s’ lows of about 3.7 per cent and, while it may edge higher on Tuesday, when data for the three months to November is published, it will remain historically low.
But while the fear of mass unemployment does not appear to be haunting workers, economists are concerned that if there are not enough people to fill vacancies, the economy will not be able to grow.
Economists point to signs this “tightness” is easing. James Smith, developed markets economist at ING, cited a Bank of England survey showing that the proportion of firms reporting that it is “much harder” to recruit has tumbled over recent months, from roughly 60 per cent last summer to 38 per cent now.
While there are early signs of increased redundancies — housebuilder Taylor Wimpey started to consult staff over job losses this week — they remain at historically low levels. Smith expects employers to reduce staff hours before cutting jobs.
Those unusual conditions in the jobs market are being scrutinised by the Bank of England, which is concerned that higher wages will fuel inflation if workers can afford higher prices.
While striking rail workers may not feel it, economists are concerned that wage rises are starting to stick. Undoubtedly good news for those receiving pay rises, but bad news for those who worry about the impact on inflation.
Data on Tuesday is expected to show that pay rises, excluding bonuses, were up to 6.4 per cent from 6.1 per cent.
Data on Wednesday is expected to show the consumer prices index up by 10.5 per cent in December, continuing the fall from October’s 11.1 per cent peak. These are still, historically, extremely high levels, but as the year progresses, the annual rate of increase should fall rapidly.
One of the drivers of inflation was the huge rise in shipping costs as economies reopened, sparking demand for goods which the shipping industry could not meet. Last week, freight rates were broadly back at their pre-pandemic levels. Data from maritime body Baltic Exchange showed the cost of container shipping had fallen nearly 90 per cent from its highs in 2021.
Falling costs should provide relief for importers and reduce costs for consumers, according to Alastair Stevenson, head of digital analytics at shipbroker Simpson Spence Young. “To the extent that we were paying through the nose to import products into the UK … those pressures are reversing. So the inflationary pressures that we had a year ago are going to be deflationary as we step into 2023.”
Another big contributor to inflation has been the rise in the price of gas and oil as a result of sanctions imposed on Russia for its war in Ukraine, forcing the UK government to introduce its energy price guarantee to protect households from rising bills. But prices are starting to fall, and calculations by Deutsche Bank suggest the government will need to guarantee bills for only three months, from April to June this year. While this will help the public purse, the £3,000 level at which bills are capped is more than double the £1,277 average bill of October 2021.
Signs that inflation has peaked suggest that the Bank of England may not have to raise interest rates much more from the 3.5 per cent they reached in December. Ahead of the next monetary policy committee meeting next month, the market is split over whether the rise will be a quarter point or half a point. Economists are increasingly predicting that will be the last — or nearly last — rise. For instance, Barclays’ economists expect the last rise in May, to take rates to 4.5 per cent — before cuts in the second half of next year to stimulate the economy.
The booming start to the year for the FTSE 100 is, in part, fuelled by expectations that the Federal Reserve in America will not have to raise interest rates much more. This encourages investment in shares and the FTSE 100 benefits because it is made up of international companies sensitive to global trends. The index comes in for criticism for being light on technology companies, but its “sin stocks”, such as tobacco, have been performing well because they generate strong cash and dividends even in recessions. Its cyclical stocks, such as mining companies, have leapt because they benefit from global improvement in trade. Paul O’Connor, fund manager at Janus Henderson, said: “The FTSE 100 offers a blend of defensive stocks that can perform well in the UK slow down and global growth stocks that can benefit from the Chinese reopening”.
Gervais Williams at Premier Miton reckoned the index could rise as much as 30 per cent this year because it is undervalued compared to US stock markets.
Those rising interest rates have taken the heat out of the housing market, where prices have fallen by 3.4 per cent from last August. That is good for first-time buyers and, as long as it does not turn into a rout, should boost sales volumes as affordability improves. But falling house prices can hit sentiment and there are concerns about the impact of rising interest rates on households with mortgages.
Last week, the Financial Conduct Authority said that 200,000 households had fallen behind on repayments by the middle of last year and that another 570,000 were at risk of doing so in the next two years. That suggests about one in ten mortgages would not be paid on time.
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