A change of mood
After a brief outbreak of genuine confidence about the UK economy in August, the mood has turned distinctly gloomier as a rather mixed summer has given way to Keats’ season of mists and mellow fruitfulness.
Initially, an expectation management campaign mounted by the new government triggered the shift towards more pessimism, but that might well have faded away once a carefully crafted Budget later this month had turned out not to be quite as bad as feared. Unfortunately, that is now being overtaken by the announcement of a series of far from positive economic indicators.
GDP growth stalls
Contrary to market expectations, July 2024 saw zero growth overall. Economists were looking for growth of 0.2%. As so often, even that disappointing standstill was down to the heroic services sector, which managed a rise – but only of 0.1%. Production fell by 0.8% and construction by 0.4%, according to the Office for National Statistics.
Monthly GDP numbers can be misleading in isolation. Quarterly figures show a clearer trend. The three months to July saw an overall rise of 0.5%, with services up by 0.6% and construction by a heady 1.2%, as against a tiny fall of 0.1% for production. There were rises in 11 of the 14 service sub-sectors, with the largest rises achieved by professional, scientific and technical services and by wholesale and retail activities. Encouragingly, consumer-facing services were up by 0.1% despite the continuing dampening of spending by the residual impact of the cost of living crisis.
Inflation is still ‘sticky’
The Consumer Prices Index remained stuck just above the Bank of England’s target rate, coming in for the second successive month at 2.2% in August. The main upward price pressure was from air fares, partially offset by falls in motor fuel, hotel and restaurant bills. Details have been released by the Office for National Statistics.
More worryingly, two inflationary elements closely watched by the Bank are suddenly heading in the wrong direction. Services inflation went up from 5.2% in July to 5.6%, while ‘core’ inflation, excluding more volatile items such as energy and housing costs, rose from 3.3% to 3.6%.
Pay rises also remain stubbornly elevated at 5.1% (excluding bonuses) or 3% after allowing for inflation. High public sector settlements agreed recently are not yet in the calculations.
Interest rates on hold
After the excitement of the ending in August of the long wait for interest rate cuts, the stickiness of services and core inflation sufficed to induce enough nervousness on the Monetary Policy Committee to prompt it to hold rates at 5%, leaving the Bank Governor to deal with the public disappointment by hinting at future reductions, almost certainly starting in November.
Employment, economic inactivity and job vacancies
Unemployment in the quarter to July 2024 has fallen back to 1.44m or 4.1% of the workforce, compared to 4.3% in the previous three months. Despite this, there remain two concerns, one social and the other a mix of social and economic. Firstly, 41% of those unemployed are between 16 and 24, indicating significant skills and youth training issues, as well as creating obvious societal implications.
Secondly, economic activity has improved slightly, but the rate is still 21.9%. Long-term illness remains the largest underlying cause, with 2.79m of the 9.3m inactive people giving health reasons as the reason.
Job vacancies continued to fall in the quarter to August 2024, down 42k on the previous quarter but 88k higher than immediately pre-pandemic. There are 1.6 unemployed people per vacancy.
Fuller details of these labour force issues were published by the House of Commons Library.
Business investment slips
With meaningful economic growth as the new government’s overriding objective, strong investment levels will be essential, but the latest figures are disappointing. Business investment was down by 0.1% in Q2 2024 compared to Q1 2024 and by 1.1% against the equivalent quarter in 2023. This continues the trend from the first quarter. That was up by 0.5% versus Q4 2023 but down 1% on the same quarter in 2023. Finding affordable ways to boost investment will have to be a priority in the forthcoming Budget, and it will have to be led by the private sector in the face of the poor state of the public finances.
Business failures
As with GDP statistics, individual monthly company insolvency numbers are hard to predict and rarely follow any discernible trend. Nevertheless, August 2024 saw a sharp fall of 18% to 2,006 failures compared to August 2023, but it was still 37% higher than pre-pandemic in August 2019.
The rolling twelve-month total to August 2024 was 26,702, which is slightly higher by 4% than August 2023 and a full 45% up on immediately pre-pandemic in the period to February 2020.
One clear development was a significant increase in Compulsory Winding Ups, which were up from 11% of failures in August 2023 to 14% now. This suggests that more creditors are taking enforcement action.
Consumer confidence falls
The inescapable reality is that a significant proportion of the UK’s economic activity stems from consumer spending on services. In this context, there was some bad news from the latest GfK Consumer Confidence Barometer, a long-established and well-respected index. The September index reported a sharp fall in overall consumer confidence from -13 in August to -20. Expectations for the next twelve months fell even more: from -15 to -27.
Business outlook
The signals on the economic dashboard may not be flashing red, but they have a distinctly amber hue right now. As such, there is still an overriding need for caution, especially until the impact on business of this month’s Budget becomes clear.
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