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UK in Focus: Twas a data nightmare before Christmas
The UK economy contracted again in October and higher wage growth and inflation stoked stagflation fears. Bank of England left Bank Rate unchanged but placed more weight on the weak activity data.
A sombre mood to end 2024
As expected, the UK economy has seen a resurgence of some old fears – reaccelerating inflation and slowing economic growth – in what may feel like a nightmare before Christmas for policymakers. For a second consecutive month, the economy contracted in October by 0.1% m-o-m, driven by broad-based weakness across all three sectors: services, industrial production, and construction. Indeed, that means growth for Q4 has started on a soft footing, although activity surveys still pointed to expansion in November and December. We now expect the UK economy to grow 0.1% q-o-q in Q4 and by 0.8% overall in 2024, while the Bank of England expects 0.0% Q4 growth.
In contrast, momentum in private sector wage growth reaccelerated to 5.6% 3m annualised in October while the headline rate of inflation rose to 2.6% in November. However, we judge these prints to be less worrisome than they seem at first glance. To some degree both were driven by base effects while inflation was impacted by higher motor fuel and tobacco duty announced in the October Budget.
More positively for inflation, services price inflation held steady at 5.0% and broader labour market metrics have pointed to a continued slowing in labour demand. Surveys showed firms opting to not replace voluntary leavers, vacancies continued to fall, and surveyed pay expectations for 2025 remain at 4.1%. At its latest meeting the Monetary Policy Committee (MPC) saw the labour market as broadly in balance – suggesting that the Committee thinks the labour market is no longer placing upward pressure on inflation.
Three turtle doves
Those challenging data dynamics, and uncertainty ahead, was reflected in the 6-3 vote split from the MPC which opted to keep Bank Rate on hold at 4.75% at the latest policy meeting. The three members who voted for a rate cut cited that current high interest rates were restricting activity, while another member saw the possibility of a more activist (faster) approach if activity data continued to disappoint.
Bank Rate has been reduced by 0.5ppts in 2024 and markets expect only a further 0.5ppts drop in 2025. However, we think the MPC, at least for now, sticks with a stance whereby it cuts Bank Rate by 0.25ppts per quarter. And from mid-2025, we think that the pace of cuts can pick up, with Bank Rate ending next year at 3.25%.
Ultimately, the speed of rate cuts in 2025 will be depend on the balance of risks – specifically, the risk of fiscal policy changes helping keep inflation sticky, versus the possibility of persistent weak demand and continued labour market loosening.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks
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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Emma Wilks
Important disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible forsale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
- This report is dated as at 19 December 2024.
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