17 May 2023
Monthly UK Economic Outlook: May
Our economists share their views on the key economic trends to watch over the month ahead.
After growing strongly in January, UK Gross Domestic Product (GDP) flatlined in February, but business surveys for March and April suggest the recovery will quicken over the coming months. While consumer confidence has continued to improve, spending growth has slowed. That said, the outlook for consumer spending is better than last year thanks to a sharp drop in energy prices and further energy support announced in the Spring budget. Tighter monetary policy is yet to show its impact in the form of softening output and employment growth. We’re probably entering a phase of lacklustre economic growth, with inflation likely to persist and the labour market still tight.
Growth ticking along
The UK economy didn’t expand in February as industrial action stunted output in the public sector, and manufacturing output was also flat. Together, these sectors account for almost a third of the economy. But there was also some good news: an upwards-revised figure for January meant economic output was back to its pre-pandemic level. Consumer-facing services grew healthily, reflecting the gradual recovery in consumer spending, and construction benefitted from better weather conditions.
Looking ahead, business surveys point to robust growth for significant parts of the economy. The composite Purchasing Managers’ Index (PMI) rose from 52.2 in March to 53.9 in April – its highest level in a year. While the manufacturing PMI fell from 47.9 to 46.6, the services sector maintained its strong momentum at 54.9, and business expectations of domestic demand over the next 12 months remained robust.
That said, consumer spending momentum is waning. After rising strongly in February, monthly gains in CHAPS card spending data slowed over March-April. Some of the decline can be attributed to one-off factors such as a wetter-than-normal March and food shortages, but non-store retailing also fell, indicating households are grappling with inflation.
UK card spending recovered in Q1 but monthly gains have slowed
Source: UK Office for National Statistics (ONS)
There will be some support to future spending in the form of a 10% increase in the value of benefits, including the state pension, in April. What’s more, households’ energy bills should fall by around 20% in July, while the pace of food price rises is set to slow soon.
For now, household finances continue to come under pressure as energy grants ended in March and bills are still more expensive than a couple of years ago.
Recent tensions in the banking sector suggest mortgage rates could rise amid a tightening of credit conditions. This could incentivise households to repay debt rather than spend.
Other parts of the economy are also struggling. Construction is under pressure from high borrowing costs, and the public services sector from industrial action. Businesses will also be affected by rising borrowing costs and reduced support for energy bills, while a corporate tax hike will hit their ability to invest.
All this suggests a sluggish economy this year, although consensus UK GDP growth forecasts for 2023 rose from -0.9% to -0.2% in April.
Core and services inflation still sticky
Core Price Inflation (CPI) eased from 10.4% in February to 10.1% in March, but this was still higher than expected. Price rises for bread and cereal pushed food inflation up to 19.1% in March – a 45-year high – with poor harvests in Southern Europe and North Africa one of the causes. More worryingly, both core and services inflation remained unchanged at 6.2% and 6.6% respectively, indicating stubborn domestic price pressures.
Looking ahead, headline inflation is on course to halve by the end of the year thanks to wholesale gas prices falling by 60% and oil by 30%. Food inflation should also drop sharply over the coming six months.
Core goods inflation should ease amid a slowdown in producer output price rises and a collapse in shipping costs. Meanwhile, wage growth, a key contributor to services inflation, looks set to slow in the months ahead.
However, the UK still has the highest inflation in the G7, and the gap looks set to persist in the coming months.
Slack slowly emerging but masked by strong employment figures
The UK labour market remains resilient. The unemployment rate rose to 3.8% in February after staying at 3.7% for the previous four months. Redundancies remain historically low, while average-three-month employment rose by 169,000 in February, well above the consensus expectation of 50,000.
But the market isn’t nearly as hot as the data suggests. February’s brisk growth was driven by a 134,000 rise in the number of self-employed, while employees rose by just 18,000. Full-time positions fell by 93,000, while part-time positions increased by 111,000 as cautious firms are choosing to hire more temporary staff due to economic uncertainty and tighter budgets.
Firms are hiring more part-time workers
Timelier data on vacancies and job surveys suggest that the labour market is cooling, albeit gradually. Vacancies fell to 1.1 million in March and are now 15% below their peak last May, while there were 20% fewer online job adverts in April than a year ago.
Meanwhile, UK labour supply seems to have turned a corner, with the economic inactivity rate down by 0.4% over the three months to February. The post-covid rise in early retirement has gone into reverse, suggesting the sharp rise in the cost of living might be encouraging some to return to work. Further boosts are likely to come from immigration and childcare support measures.
Despite this modest increase in labour market slack, growth in total pay including bonuses held steady at 5.9% in the three months to February, although forward-looking indicators point to slower wage growth in the months ahead. But the labour market is likely to remain an area of relative strength.
What’s in store this week for currencies and FX markets?
What’s in store this week for currencies and FX markets?
Our economists share their views on the key economic trends to watch in the month ahead.