Stalling Or Crawling ... What do we know about growth ...

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Subject: Stalling Or Crawling ... What do we know about growth ...

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Monday 13th November 2023

Hi Friend,

On Thursday last week, the ONS released the monthly estimate of GDP growth for September. For some analysts, growth was stalling. For others growth was crawling, with some evidence of modest growth year on year.

We should call this the Schrodinger's cat economy. An economy both simultaneously alive or dead, With a government, objectively standing aside, undertaking a sort of quantum thought experiment to see what happens next.

The data set was flat compared to the previous three months. Compared to the third quarter last year, growth was up by 0.7%. This, after growth year on year, of 0.6% in Q1 and Q2. Assuming no growth in the final quarter, the economy will have expanded by 0.6% for the year as a whole.

This projection (0.6%) is in line with the Bank of England latest Monetary Policy Report for November. It's also in line with the latest National Institute (NIESR) UK Economic Outlook Autumn edition also released last week (0.6%).

The devil, as they say, is in the detail. Manufacturing growth was up by 3% in the third quarter. Construction output was up by 2.5%. Service sector growth was up by just 0.5% as a whole. Strong growth in admin and support (5.2%) was offset by 5.2% decline in transport and storage. Strong growth in accommodation and food (2.3%) plus 3% growth in information and communications, was offset by slowdowns in financial services, professional services, insurance and real estate. (-0.8%.)

It is a story of sectors, not widespread economic malaise. Car sales are up 20% year in year. Interest rates appear to have peaked. The Bank of England is projecting zero growth next year and just 0.4% in 2025. As we said last year, Why So Gloomy? The models ain't that great.

NIESR have plugged in growth of 0.5% in 2024 and 1.0% in 2025. The average of forecasts from the panel of independent forecasts published monthly by Treasury is 0.5% in 2023 and 0.5% in 2024. The OBR (published in March) had a negative 0.2% out turn for the current year and 1.3% growth next year.

So what do we know about growth? Not stalling but crawling. Crawling until the government gets a grip on policy. The King's speech was well articulated in presentation but stuttering in content. The Autumn statement does not offer up much hope of a boost to growth. The NIESR expectations seem reasonable for now.

Stalling or Falling ... What to expect from inflation ...

The inflation figures for October will be released on Wednesday this week. The Bank of England and most analysts are convinced the headline CPI index will fall to 4.7% from 6.2% last month. Thereafter inflation CPI may hit 4.5% by the end of the year.

The large fall expected is a result of the adjustments to the Ofgem energy price caps. The 25% increase introduced in October last year, is now consolidated into the twelve month comparison. In October this year a 7% reduction in the price cap is now included into the year on year comparison.The Ofgem effect could have reduce the headline rate by over 1%.

The impact on the underlying or core rate will not be as dramatic. Last month the core rate fell from 6.2% to 6.1%. Service sector inflation increased to 6.9% from 6.8%. The core rate may fall below 6% but service sector inflation remains a key concern for the Bank of England and the Monetary Policy Committee.

Of further concern is the trend for earnings. Average earnings at 8% is just not compatible with a 4% inflation target, let alone the 2% inflation mandate. The MPC models assume a more modest interpretation of the earnings trend. 7% growth in earnings is the figure best sought in this week's data.

If the data on earnings and inflation fail to meet expectations, then Chief Economist Huw Pill's projections of a early rate cut will fail to materialise. But this was never or forecast view anyway and it is certainly not the view of the Governor ...

That's all for last week! Have a great week ahead ...

John

To understand the markets, you have to understand the economics ...

© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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Subject: Stalling Or Crawling ... What do we know about growth ...