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| | Hi Friend, Starmer's About to Inherit An Economic Boom ... Or Is He?
The Labour leader is beginning his premiership, with the best economic backdrop in years, according to Szu Ping Chan, writing in The Telegraph on Thursday.
The article appeared following the release, by the Office for National Statistics (ONS), of the GDP monthly estimate, UK for May 2024.
The U.K economy grew at double the pace predicted by economists in the month, in a boost for Sir Keir Starmer and Rachel Reeves. The economy expanded by 0.4pc on a month on month basis. This is the fastest pace in more than two years and double the 0.2pc expected by analysts, according to the Office for National Statistics.
Better still, compared to previous year, (our favourite measure), the economy grew by 1.4%. The strong performance prompted economists at Goldman Sachs to upgrade their own growth forecasts.
James Moberly, economist at Goldman, said: "We raise our annual GDP growth forecast for 2024 to 1.2pc. This is above consensus of 0.7pc and the Bank's forecast of 0.4pc."
At The Saturday Economist, we are flagging a change in our expectations for the year. Assuming no growth month on month for the rest of the year, growth in 2024 will be around 1.2%, (last year's performance was so bad). We await a further month's data for June and the second quarter of 2024 to confirm the call. Forecasts for the year could be revised even higher if the growth spurt continues.
Grant Fitzner, the ONS's chief economist, described the expansion as "buoyant", (but not gangbusters) adding other indicators of the economy suggested the recovery was gaining traction.
Britain's services sector was the largest contributor to growth, with the sector expanding by 1.6 per cent year on year. Transport and distribution was up by over 7 per cent, professional services sector was up by over 4 per cent.
Liz McKeown, director of economic statistics at the ONS, said: "Construction grew at its fastest rate in almost a year after recent weakness, with house building and infrastructure projects boosting the industry."
Growth in professional services was also a bright spot for the economy both in May and since the start of the year. The ONS said May's growth was driven by a rise in "scientific research and development" as well as technical testing and analysis linked to the engineering sector."
Mr Fitzner said: "It continues a reasonably buoyant trend that we've seen through the first half of this year. Some of that is a bounce back from the downturn from last year, but this is continuing into the second quarter."
The Pound rallied closing at just under $1.30 on Friday. Markets appear confused by mixed messages from the Federal Reserve and the Bank of England for that matter. The TSE chart suggests this is an over extension in the short term, some short positions should be restored at the start of next week. We expect the Sterling rally to fade somewhat.
Ten year gilt yields moved down slightly closing at 4.11 from 4.12. Two year gilts closed off five basis points in the week.
It may not be a boom, but higher growth will ensure additional monies into the Rachel Reeves coffers, allaying fears of tax hikes, perhaps ...
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| | So what Of Rates ?
UK Markets now believe there is a 50:50 chance the Bank will start cutting rates in August. However, two policymakers suggested on Wednesday that rate cuts were not imminent.
James Haskell warned Britain's battle against inflation remains incomplete, requiring interest rates to be kept at elevated levels for longer than expected. Pouring cold water on City predictions for a cut in rates in August, Haskel said inflation was on course to return above the government's 2% target before the end of the year.
"I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably," said Haskel, in a speech at King's College London on Monday.
Catherine Mann, who had been voting to raise rates higher than their current level of 5.25pc until a few months ago, said she remained concerned about robust price rises in the services sector, which powers more than three quarters of the British economy.
Bank chief Economist Huw Pill warned, The UK economy is still is suffering from "uncomfortable strength" in wage growth and service sector inflation.
In his first public comments since the announcement of the general election in June, Huw Pill said key measures of price growth remained high, even though headline inflation has fallen back to the Bank's 2 per cent target.
'With annual rates still not far from 6 per cent, services price inflation and wage growth continue to point to an uncomfortable strength in those underlying inflation dynamics," Pill said. However, he admitted that it was still a question of "when not if" the Bank would cut interest rates this year.
"When Not If ?"
For the moment, our overall forward guidance outlook remains unchanged. We expect a series of two base rate cuts in the current year possibly beginning in August. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025. |
| That's all for now. Have a great weekend break ... we were a day late this week, sorry about that. Enjoy the match tonight ...
John
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| To understand the markets, you have to understand the economics ...
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References This week's posts relies on extracts from our daily "What the Papers Say Review." Certain research content has also been generated using Perplexity AI. This is our favorite AI research tool. Photos are from The Telegraph and the TSE slide deck.
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| © 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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