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MIXED NEWS FOR THE UK AS TECHNICAL RECESSION IS CONFIRMED BUT INFLATION CONTINUES DROPPING
Data Sourced from FE Analytics, and Bloomberg Finance LP
MIXED NEWS FOR THE UK AS TECHNICAL RECESSION IS CONFIRMED BUT INFLATION CONTINUES DROPPING
This week we got what should have been monumental news that the UK is officially in recession. The specific definition being used for this headline isn’t particularly useful however. Most people would associate a recession with rising unemployment, something we have yet to see. So far belt tightening in the retail sector is dragging down growth figures thanks to poor Christmas sales but if it keeps up, we can expect job losses eventually. That the last six months haven’t exactly been great for the UK economy should come as no surprise to anyone.Elsewhere the mood is likely more upbeat over at the Bank of England. A recession is the best known cure for inflation and they’ve been trying one cause one ever since they started jacking up interest rates. How bad things need to get and for how long before they’re satisfied will be questions they’ll need to answer. In an election year this could be a boon to Labour who can now blame the government for causing a recession, but there is every chance the figures could be revised up in a few months and the Conservatives will take the credit for a recovery so it’s probably a wash.INFLATION: MARKETS CHOPPY AS UK AND US SEND DIFFERENT SIGNALS
Government bond markets experienced high levels of volatility as contrasting inflation readings in the US and UK cast doubt on the timing of central bank interest
rate cuts. Headline consumer inflation in the US dropped from an annual rate of 3.4% to 3.1% but this was higher than expected due to rising costs of housing and services. Monthly CPI and core inflation (excluding more volatile food and energy costs) were also higher than expected. The inflation numbers added to doubts that the Federal Reserve would cut interest rates in the spring and caused government bonds and US equities to fall.However, contrasting news from the UK helped markets recover as UK inflation was better than expected. Headline CPI inflation was tipped to rise in January but it remained unchanged at 4% as food prices fell for the first time in two years. Core inflation was unchanged at 5.1%. The more positive news helped push UK gilts towards a gain for the week and helped calm US bond and equity markets.UK: ECONOMY ENTERS RECESSION AS WAGE GROWTH REMAINS STRONG
The UK entered a technical recession at the end of 2023. GDP contracted by 0.3% in the final quarter following a 0.1% drop in the third quarter. The decline was bigger than expected as services, manufacturing and construction output all fell. This reduced full year GDP growth for 2023 to 0.1%. The European Union managed to escape a recession as fourth quarter GDP was flat, following a decline of 0.1% in Q3.In contrast to poor economic growth, the UK labour market is still robust as unemployment fell in the last quarter of 2023 to 3.8%. The Office for National Statistics says current employment data is not as accurate as it would like but data on job vacancies and average wages is more accurate. The number of job vacancies has declined slightly but is still above the long-term average. The growth rate for average wages also declined slightly, but this remains higher than inflation. Contrasting data presents a problem for the Bank of England as it balances concerns over weak growth with the inflationary effects of rising wages.EQUITIES: BIG BRANDS WARN THAT CONSUMERS ARE MORE CAUTIOUS
Large consumer brands are warning of slowing sales due to a combination of high inflation and low consumer confidence. Heineken said higher prices are
starting to affect sales. The world’s second-largest brewer said sales volumes fell 4.7% in 2023 and the company reduced its forecast for profits in 2024. Coca-Cola HBG
(the London-listed European bottling company) reported strong profits growth but said it had to make adjustments to its pricing and promotions as consumers have less to spend. Meanwhile Sainsbury’s, JD Sports and Electrolux all say sales of non-essential and big ticket items have been weaker as shoppers choose cheaper alternatives or defer their spending.UK consumer discretionary stocks have significantly outperformed the broad equity market over the last 12 months as companies such as Next and Unilever have managed to maintain sales volumes or even pass on higher than inflation price hikes. However, this week’s updates show consumers’ ability and willingness to accept further price increases is being tested.For more information regarding our weekly market reports, we encourage you to give us a call on 01732 746188 or send us an email at enquiries@foxgroveassociates.co.uk.
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