Leading Indicators | Divergence emerges in the global inflation story
Discover key economic and financial metrics, and what to look out for in the week ahead.
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Here we look at the leading indicators in the world of economics.
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UK LABOUR MARKET CONTINUES TO LOOSEN
The UK’s unemployment rate increased by 0.3ppts to 4.2% in the three months to June 2023, its highest level since September 2021 and above forecasts of 4.0%. Since October 2022, the UK unemployment rate has risen by just 0.5ppts, yet UK inflation has fallen from 11.1% to 7.9%. As a result, some are questioning whether unemployment is the right labour market metric to track. Job vacancies, which moderated for the 13th consecutive 3-month period in June, may be a more telling measure.
At 7.8%, June’s annual growth in regular pay (excl. bonuses) reached the highest level since records began in 2001. With wages continuing to accelerate, economists widely expect at least one more rate hike from the Bank of England (BoE). Money markets are currently pricing in a 25bps rate hike from the BoE on 21st September and a further 50bps of tightening through March, taking its base rate to 6.0%.
GLOBAL INFLATION STORY DIVERGES
Inflation will remain the topic of conversation this week, when the UK figures for July are published tomorrow. The consensus forecast envisages a fall to 6.7% in July, from 7.9% in June, while the BoE forecasts a moderation to 6.8%. Overall, the central bank expects inflation will decline to 5.0% by the end of this year, and reach its 2.0% target by early 2025. In the eurozone, inflation fell for the third successive month to 5.3% in July, its lowest level since January 2022. Meanwhile, in the US, inflation accelerated slightly for the first time in 12 months to 3.2% in July from 3.0% in June. China has already moved into deflation, with prices falling by 0.3% y/y in July, the first decrease since February 2021. In response, China’s central bank lowered its rate on one-year loans by 15bps to 2.5%, its second reduction since June. This aligns with China’s subdued economic performance, with GDP expanding by just +0.8% q/q in Q2 2023.
UNCERTAINTY RISING, AGAIN
The summer has witnessed a resurgence in global uncertainty, with political drivers at the forefront. Most recently, elections in Spain and Italy have made headlines, and the run-up to next year’s elections in the UK and US has already started. More concerningly, this month has seen a coup in Niger, ongoing conflict in Ukraine, and multiple live examples of climate change. These events are a stark reminder of the implications of uncertainty on global prices, growth, and stability – in addition to the obvious human cost. Financial markets are beginning to reflect this uncertainty, with the CBOE VIX volatility index up by +19.8% over the month. Experience suggests that some investors will favour private assets, including direct real estate, as a place to weather the storm.
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