Final Friday, UK GDP got here in a tick larger than anticipated. As an alternative of the stagnant 0% anticipated by economists, the UK financial system expanded by 0.2% over the three months to June. On this case, a 0.2% shock is on no account insignificant. The truth that the financial system was capable of eke out development within the face of already aggressive rate of interest hikes will galvanise the Financial institution of England’s zeal to proceed tightening financial coverage. Persistent inflation and runaway wage development would be the BOE’s Public Enemy No.1, whereas faltering client confidence and enterprise surveys will develop into an afterthought.
Employment information factors in direction of a slackening labour market, with workers availability rising, fewer workers appointments, and the variety of redundancies rising. Whereas new vacancies are nonetheless rising, the speed of development is as little as it has been for two.5 years. BOE Survey information helps a softening employment market. Nonetheless, due to low unemployment, wage inflation will seemingly stay sturdy, given the dynamics throughout each private and non-private sectors. Industrial motion within the public sector is proving efficient and has emboldened commerce unions, while the personal sector is submitting to larger wages to keep away from having to recruit from a good labour market. This latter instance of labour hoarding is a characteristic of corporations being pragmatic in an financial system the place the labour power development has levelled off over current years as a result of pandemic and a smaller pool of immigrant labour. This can be a delicately balanced dynamic which is presently in favour of labour, however which might flip rapidly within the occasion of slowing financial exercise.
This week’s UK CPI print will seemingly are available in decrease than final month, attributable to base results and survey studies which level to extra fluid provide chains. We don’t anticipate that the upper GDP information to be sufficient to derail that. It’s true that corporates are having fun with an atmosphere the place enter costs will be handed by means of to shoppers extra simply, however the price of debt servicing signifies that households are being compelled to be extra circumspect about their discretionary spending which can trigger inflationary pressures to ease. Nonetheless, given the structural resilience we see within the labour market and companies sector, the take a look at shall be whether or not the quantity is low sufficient to take the stress off the Financial institution of England to maintain elevating charges, notably as we don’t see inflation falling again to wherever close to 2% this yr.
The age-old query of simply how lengthy it takes for fee rises to influence the true financial system is now extra pertinent than ever. However now that the financial system is displaying some resilience, we suspect that we’ll not have seen the top of fee rises.
David Baker – Chief Funding Officer