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Thursday 18th May 2023
So what happened to the economy in the first quarter of 2023 ...
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| | Hi Friend,
Growth ...
The
economy appears to have expanded by 0.5% year on year, with strong
growth in construction (4.5%) and services (0.7%). This suggests a
positive performance overall, offset by a 2% fall in manufacturing. Part
of the drop in manufacturing, reflects a return to trend rate,
following a period of over expansion, peaking in the second quarter of
2021. We expect a stronger performance in the rest of the year.
Within
the service sector, strongest areas of growth were in Administration
(5.9%), Accommodation and Food, (3.8%) and Professional and Financial
Services (3.8%).
So what of the year as a whole? In our
presentations, we forecast growth of 0.4% this year. At present there
appears to be no reason to adjust the forecast. The Bank of England now
expects the U.K. to avoid recession in 2023, projecting growth of 0.0%
this year. The latest NIESR forecasts in the Spring update are
forecasting growth of 0.3% in the current year.
Growth in 2024 is expected to be around 1%. The Bank of England slightly more pessimistic than the conservative NIESR numbers.
We
always considered the Bank and the OBR to be too gloomy. An aspect
compounded by the gloomy over view from the IMF in Washington. We model
in growth of 1.5% in 2024 and 2.0% in 2025. We expose our optimism bias
perhaps.
Inflation ...
In
the first quarter of the year, inflation CPI basis averaged 10.2%.
Producer output prices averaged 11%. Producer output prices averaged
13.4%. Both producer indices had fallen to average 8.5% in March.
In
the U.S. the trend is in the right direction. Consumer price inflation
was down to 4.9% in April. Producer output prices were down to 2.3%..
Energy
prices have fallen. Gas prices have collapsed. Oil prices Brent Crude
averaged $82 in the first quarter compared to $100 dollars in the same
period in 2022.
Food price inflation is expected to fall
significantly from April onwards. The overall rate of inflation (CPI
basis) is expected to fall to around 5% by the end of the year. The 2%
target for headline inflation may remain elusive into 2025.
Employment and Earnings ...
Unemployment
was 1.3 million in the first quarter. The unemployment rate was 3.8%.
The number of vacancies averaged 1.1 million, the challenge of
recruitment persists into the New Year. We expect inflation to drift
slightly higher to 1.45 million by the end of the year. The u-rate
rising to 4.1%.
Earnings in the first quarter averaged 5.8%. We
expect this to peak in April, drifting slightly lower to around 5.2% by
the end of Q4. The underlying rate of wage inflation will underpin the
forward outlook for prices despite the hopes of the Bank of England.
Total
employment in the first quarter increased to just under 33 million.
This was slightly ahead of the pre covid level at the beginning of 2020.
The number of people self employed increased. The number of UK citizens
in work fell. The number of foreign workers increased. Workers from
outside the EU hit a new record of 4.2 million. The number of workers
from within the EU area increased to 2.5 million, almost back to the
pre covid peak in the first quarter of 2020.
The labour market
data illustrates the shambles of immigration strategy, industrial
strategy and education strategy, as jobs for EU and non EU workers
continue to grow.
Interest Rates ...
UK
Base rates were increased in the first quarter, to average 3.85%,
rising to 4.25% in April and 4.5% in May. Ten year gilt rate average
3.54% in the quarter rising to 3.65% in April and trading at 3.77% over
the weekend.
We may have seen the peak for interest rates in this
cycle as the Bank adopts a wait and see approach. A further 25 basis
point rise may yet be a possibility in the U.S. and the U.K. This is not
our central forecast scenario. We expect base rates to remain higher
for longer than markets currently expect.
We still expect US ten
year bond yields to average 4.00% in the final quarter of 2023. U.K.
rates will rally to average 4.00%. The hard yards now gained in life
after Planet ZIRP. There will be no return to the forbidden planet.
In
the UK, prior to the Great Financial Crash [2000 - 2008] the average
inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year
bond yields averaged 4.50%.
Want to know more ...
Stay
up to date with our Friday Forward Guidance Features on Rates and our
Monday Morning Markets updates on equities, bond yields, exchange rates,
and commodity prices. Available on The Saturday Economist web site.
To understand the markets, you have to understand the economics … and we do.
Have a great weekend,
John
Notes on Data Presentation
At the Saturday Economist we use the year on year comparison to present the rate of change on principal indices. Data from
ONS : GDP monthly estimate, UK March 2023 16th May 2023
ONS : Employment by country of birth 16th May 2023 |
| | “Whenever the Fed hits the brakes,
someone goes through the windshield. You just never know who it’s going
to be.” No we know ...
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Have a great week, we will be back with more on the economy shortly,
John
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| | | To understand the markets, you have to understand the economics ... and we do
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© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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