There is plenty of economic data emerging about the UK economy, from workplace and GDP statistics to house prices and inflation. But what picture is it painting?
For James Lynch, fixed income fund manager at Aegon Asset Management, the picture is mixed - but with plenty of bright spots for both those of a bearish and those of a bullish disposition.
For example, he notes that wages overall rose by more than expected, but says the growth came in public sector wages, with those in the private sector declining.
Therefore, overall, the wage growth was at a level above that expected by analysts forecasts, and Lynch says: “Depending on your starting view, you really can take what you want from it to support your argument.”
The great 'unretirement' helped drive a record number of people back to work.Helen Morrissey, Hargreaves LansdownThe state of the labour market was revealed in data, released on February 14, had those of a bearish disposition, such as John Greer, head of retirement policy at Quilter, noting a decline in the number of job vacancies in the economy decline.
Despite pointing out the bright spots, Lynch adds: “The one that matters most though is what the Bank of England thinks and whether they are interested in developments in private wages and service inflation.
"From the MPC’s point of view there is probably enough to suggest that because private sector wages have not accelerated, and indeed fell, this is an encouraging sign.
"The good news for the MPC is there is another employment report before they meet again to make their policy rate decision. If private sector wages fall again it is likely the majority of the MPC will see their job is done on rate increases."
Konstantinos Venetis, a director of Global Macro at TS Lombard, says: “Labour demand is cooling at the margin (vacancies are still high but reverting lower) and supply is showing signs of improvement (inactivity rates ticking down), so what likely lies ahead is stabilisation in pay pressures."
The latest Agents’ survey suggests that average pay settlements in {the first half of} 2023 are expected to be lower than those made in the second half of 2022.
He says this is in line with the message from other surveys that also point to sequential deceleration in wage inflation.
The labour data showed the total number of vacancies in the economy to be 1.13mn, a decline of 76,000 on the previous month, and this represents the seventh consecutive month in which the number of vacancies has fallen.
Vacant situations
That may be significant for the wider economic outlook as if the number of vacancies is falling, it implies the labour shortages in the economy may be easing, which may constrain the wage inflation in the economy which has been central to the Bank of England’s justification for putting interest rates up.
Another factor, highlighted by Helen Morrissey, head of pension analysis at Hargreaves Lansdown is the rise in the labour market participation rate, that is, the number of individuals in the economy seeking, or in, employment.
The data showed 200,000 extra people joined the workforce in the final quarter of 2022.
So if the number of vacancies continues to decline and the number of workers continues to rise, the implication would be that wage pressures would ease.
Goods disinflation should have further to run.Konstantinos Venetis, TS LombardThe unemployment rate rose, but remains below the 4.5 per cent level which the Bank of England defines as being “full employment.
Morrissey said: “The great 'unretirement' helped drive a record number of people back to work in the year to October-December. After an exodus from the workplace during the pandemic, more people are swapping the sofa for the office chair again."
She adds that the rising cost of living will be playing a part, as people are realising their pensions may not go as far as they had expected.
However, Morrissey adds: "We also know some of these people stopped work because of long term sickness, so better health may have encouraged them to reconsider a return to work.”
Inflation
On Wednesday February 15, the inflation data came in, which revealed a slight cooling in the headline CPI to 10.1 per cent.
This was down from a peak of 11.1 per cent in October, and is the lowest level for five months. That may mean the Bank of England feels less obligation to put interest rates up further. The market presently expects UK rates to peak at 4.5 per cent in this cycle, they are currently 4 per cent.
One economist casting a more positive light on the inflation data is Venetis.
In a note to clients he says: “The macromix is improving at the margin as inflation looks as though it is moving past its peak, and PMI (Purchasing Managers Index) surveys suggest negative growth momentum is abating.”
The UK still is the only G7 country in which GDP has not exceeded its pre-Covid peak yet.Samuel Tombs, PantheonHe added: “Goods disinflation should have further to run. This is the message from the leading indicators (e.g., import prices, PMIs); recent sterling appreciation; and ongoing pressure on manufacturers to reduce high inventories via price discounts.
"Services inflation is still pointing up, however, against the backdrop of an unusually tight labour market.”
Growth pains?
Samuel Tombs, chief UK economist at Pantheon, says the data is broadly in line with the Bank of England’s expectations and enhances the chances the bank will keep interest rates at the current 4 per cent when next it meets.
Tombs is also scathing of the significance of the UK’s narrowly avoiding recession at the end of 2022, when the final quarter was flat.
He says: “No recession on the pedantic definition of two consecutive quarters of falling GDP, but a calamitous performance nonetheless. The UK still is the only G7 country in which GDP has not exceeded its pre-Covid peak yet.”
Venetis noted that at the most recent meeting of the Bank of England’s Monetary Policy (MPC), the central bank now expects the economic downturn in the UK to be “less severe” than its forecast of three months earlier.
Therefore, Venetis' view is that right now the risk is that the market and central bank are being too pessimistic about the outlook for UK growth.
So with the data painting a somewhat confusing picture (added to by the FTSE 100 hitting a record high), it is difficult now to tell where the "animal spirits" which govern so many investment and economic decisions will end up, but advisers may start to feel the conversations with clients around UK exposure are about to get a bit more cheerful.
David Thorpe is investment editor at FTAdviser
