The party that wins the general election on 4 July will inherit an economy running out of steam. The scenario of a slowdown in growth in Q2 (+0.2% q/q), and over 2024 as a whole, remains our central forecast. Surveys data (PMI, GfK consumer confidence index) and investment have recovered, but household consumption remains depressed. While disinflation supports purchasing power, rising unemployment and the persistence of high interest and savings rates are limiting its effects. The rise in mortgage payment arrears indicates that the refinancing shock is continuing to spread. The return of inflation to 2% in May will support the Bank of England in its decision to initiate a first cut in key rates in August, according to our forecasts, which will give households (little) breathing space.
GROWTH AND INFLATIONAfter months of resilience, are the latest developments in unemployment marking the beginning of a turnaround on the job market? It’s still too early to say. Nevertheless, the claimant count, which had already climbed to a level significantly higher than the period before the health crisis, rose by 50,300 in May, the strongest monthly increase, excluding Covid-19, since 2009.[1] However, PMI surveys remain positive. The composite index has been stable and in positive territory since the beginning of 2024 (53.0 in May), while the employment sub-indicator is not dropping, albeit just about in expansionary territory (50.6). Household confidence is also rising against the backdrop of purchasing power gains: in May, the GfK index reached its highest level since December 2021.
Nevertheless, persistently high interest rates are keeping households under pressure. The average mortgage interest rate has been almost stable since September, and close to 8%. The proportion of arrears on all outstanding mortgages has risen since summer 2022, as a result of the triggering of the monetary tightening cycle, reaching 1.3% in Q1 2024. During the subprime crisis, this figure rose to 3.5% in Q2 2009.[2] Although a strict comparison may be misleading, it provides, at least, an important point of reference. In addition, monetary tightening has a lagged effect, and some UK households having borrowed at fixed rates for a relatively short term (2-5 years) still have to renew their mortgages at higher rates. In an unfavourable scenario, where unemployment increases and mortgage interest rates remain high, the proportion of payment arrears would continue to increase, further weakening household consumption and the UK economy as a whole.
The lowering of the cap on regulated gas and electricity tariffs in April (-12.3%), which will continue in July (-7.2%), allowed headline inflation to fall to 2% in May. Nevertheless, inflation in services remains strong, buoyed by the robust increase in regular pay (+5.7% y/y in April). The latest PMI surveys suggest that there will be further disinflation in services in the future (the input price index fell 7 points in May, the second strongest monthly decline ever). Nevertheless, the trade-off for the BoE, between price stability and economic growth, remains delicate.
Weak productivity gains and sustained wage growth are also impacting the profitability of companies. In the last quarter of 2023, unit labour costs rose by 6.9% y/y compared with CPI inflation of 4.2%. While some companies seem to have been able, initially, to absorb this increase in wage costs, through higher sales prices and/or lower margins, the question is how long this can last. In any case, the UK economy should continue to underperform most other G7 economies in the coming quarters.
MEASURES TO SUPPORT HOUSEHOLD PURCHASING POWER
Article completed on 19 June 2024
