The economic situation in the UK continued to deteriorate in Q4 2023. Real GDP contracted 0.3% q/q, after falling 0.1% q/q in Q3. Although economic activity remained marginally in positive territory for 2023 as a whole (with 0.1% growth), it deteriorated throughout the year, resulting in a negative carry-over effect for 2024. The growth outlook for 2024 is even more unfavourable, as economic activity is expected to stagnate in H1 before a sluggish recovery from summer onwards.
Headline and core inflation remained stable and high in January, at 4.0% y/y and 5.0% y/y, respectively. This should only be temporary as, according to our forecasts, inflation should decelerate again in February and headline inflation should fall back below the 2% threshold in Q2. Core inflation should remain above this level in 2024. In addition, changes in producer prices are quite clearly pointing to the pursuit of the consumer price disinflation cycle: the production price index fell 3.3% y/y in January, a decline largely caused by lower energy costs (oil and gas).
The slowdown in inflation and the resulting improvement in household purchasing power, also fuelled by strong wage growth, have led to an uptick in household confidence for several months now. However, sentiment deteriorated slightly in February, according to the GfK Consumer Confidence Index. At the same time, the recent recovery has not led to any improvements in terms of consumption, which fell again in the last quarter of 2023, by 0.1% q/q. Retail sales had fallen sharply in December (-3.3% m/m), and the rebound seen in January (+3.4% m/m) simply offset this drop.
The industrial sector is facing major difficulties, both at the cyclical and structural levels, and signs of a recovery remain thin. Although the manufacturing surveys (CBI and PMI surveys) have improved somewhat recently, their level remain depressed. The manufacturing PMI stood at 47.1 in February, contracting for the tenth consecutive month, while the CBI survey showed an order volume index below its long-term average (with the index standing at -20, compared to an average of -13). It is also worth noting the sharp drop in the employment PMI index (-5.2 points, to 42.4), which fell to levels comparable to the ones observed during the pandemic.
Article completed on 29/02/2024
