Leading Indicators | BoE’s conundrum persists as labour markets remain robust
Discover key economic and financial metrics, and what to look out for in the week ahead
2 minutes to read
Here we look at the leading indicators commodities, trade, equities and more. in the world of economics. Download the dashboard for in-depth analysis into commodities, trade, equities and more.
LABOUR MARKET MAINTAINS PRESSURE ON BOE
The UK unemployment rate lifted by 0.2ppts to 4.0% in the three months to May 2023, above expectations of 3.8%, however, remaining below the long-term average of 6.7%. Meanwhile, UK employees' average regular pay (excl. bonuses) grew by +7.3% over the same period, equalling its highest level on record. This follows yesterday's comments by the Bank of England (BoE) governor Andrew Bailey and Chancellor Jeremy Hunt, who called for wage restraint, as they noted that high wages were impacting the UK’s fight against inflation. Indeed, pressure remains on the BoE to continue tightening its monetary policy. Money markets are now pricing in an interest rate of 6.5% by March, while economists anticipate the base rate to peak between 5.25% and 5.75%, depending on the forecast house. But the UK is not alone. It is widely expected that the US Federal Reserve will resume its rate hiking cycle in July with a 25bps increase, bringing the target range to 5.25% - 5.50%.
RECESSION AHEAD?
The UK gilt curve is currently the most inverted it has been since June 2000, with the 2-year gilt yield 90+bps above the 10-year gilt yield. The 10-year gilt is at its highest level since October 2008 at 4.68%, while the 2-year gilt is at levels last seen in June 2008 at 5.38%. In the US, an inverted yield curve is a reliable indicator of an impending recession; however, it is less telling in the UK. An inverted US yield curve has preceded every US recession since the 1960s with just one ‘false positive’. In contrast, in the UK, it has preceded three out of four recessions since the 1980s but also predicted two ‘recessions’ that didn’t transpire. While some think that a modest recession could occur this year given the majority of the drag from higher interest rates is yet to be felt, consensus is still for modest growth in both 2023 (+0.1%) and 2024 (+0.8%).
FLIGHT TO QUALITY
Our analysis of London office leasing data between 2018 and 2023 (YTD), demonstrates the shift towards more efficient buildings. The proportion of London office take-up with an EPC rating of C or above has risen from half in 2018 to almost three-quarters in 2023 thus far. More than 40% of London office leases in 2023 (YTD) have been for EPC-rated A or B buildings, up from 21% in 2018 and 37% in 2022. Not only are occupiers demanding better space, but they are also willing to lease them for longer. Over the past five years, the highest EPC rating, A, corresponds to an average lease length of 8.93 years, the longest among all ratings. Meanwhile, the average lease length for buildings with EPC ratings C, D, and E range from 6.21 to 6.69 years.
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