Hi Friend,
Growth ...
The economy appears to have expanded by
0.4% year on year in the second quarter, with growth in construction (2.6%), manufacturing (0.8%) and services (0.4%). This suggests a positive performance overall, slightly lower than the first quarter growth of 0.5%.
Car registrations increased by 20% in the first seven months of the year, providing a boost to output. The earlier setbacks in manufacturing, reflect a return to trend rate rather than a setback to output.
In the first half of the year, growth was just over 0.4%. Unexciting maybe, but still suggests much of the gloom and doom is overdone.
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 latest NIESR forecasts in the August update, now also project growth of 0.4%.
According to NIESR, growth in 2024 is expected to be 0.3%, not really sure why. We model
in growth of 1.0% in 2024 and 1.5% in 2025. We expose our optimism bias
perhaps.
Inflation
In
the second quarter of the year, inflation CPI basis averaged 8.4%. Producer output prices averaged 2.6%. Producer input prices averaged 1.7%. Manufacturing cost trends have fallen rapidly. We expect CPI inflation to average 6.0% in Q3 and 5.0% in the final quarter.
Energy
prices have fallen. Gas prices have collapsed. The continuing war in Ukraine and uncertainty in the Black sea maintain an overhang on price trends.
Oil prices Brent Crude
averaged $78 in the second quarter compared to $114 dollars in the same
period in 2022. Oil marked at $86.81 this morning. The impact of Saudi cuts to output are assessed. We model average prices at $84 dollars in the final quarter.
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 1.37 million in the second quarter. The unemployment rate was 3.8%.
The number of vacancies averaged 1.0 million, the challenge of
recruitment persists. We expect unemployment to drift
slightly higher to 1.45 million by the end of the year. The u-rate
rising to 4.1%.
Earnings in the second quarter averaged over 6.5%. We
expect this to peak in the quarter, 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 over 33 million. The number of people self employed was steady at 4.4 million.
Interest Rates
We maintain our base rate peak this year at 5.5% on the basis of a further 25 basis point hike in September. We model 4.50% as the long run rate for base rates and ten year gilts in life after Planet ZIRP and yes you can have economic growth with 4.5% rates.
The gilt curve softening reflects our mid term projections. Short rates up to one year remain too high. Long term rates are falling into place. Mortgage rates are easing back reflecting the more moderate outlook for base rates.
We still expect US ten
year bond yields to average over 4.00% in the final quarter of 2023. U.K.
rates will also average over 4.00%. Ten year gilt yields marked at 4.52% this morning.
In
the UK, prior to the Great Financial Crash [2000 - 2008] the average
inflation rate was 2.0%, the average UK base rate was 4.50%. Ten year
bond yields averaged 4.50%. The average growth rate was 2.5%.
The hard yards now gained in life
after Planet ZIRP. There will be no return to the forbidden planet. Under pricing capital is never a great idea.
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