17 April 2024: Wage increases are still above headline inflation

The March employment report was published yesterday, and it contained two items that will be of concern to members of the Monetary Policy Committee.

Job creation is still strong, with the claimant count for February being revised down from 16.8k to 4.1k, while the March number was close to the long-term average at 10.1k.

This led to an unchanged unemployment rate of 4% which is not a rate that is usually associated with an economy that has recently been in recession and even now is struggling for growth.

Furthermore, the rise in average earnings was also unchanged at 5.6%. That will make introducing a cut in interest rates more difficult for the Bank of England.

With monthly inflation data due for publication later this morning, the market’s prediction is a fall from 3.4% in February to 3.1%. While any drop is positive, the rate of fall is still not what was expected at this stage of the economic cycle, with interest rates unchanged at a sixteen-year high for six months.

During the first quarter of 2024, the economy has begun to make up ground that was lost during 2023. Figures released by the Office for National Statistics predict that growth will remain at about 0.3% on a per-annum basis, which is better than its earlier predicted gain of 0.1% over the first half of the year.

The IMF, which monitors the growth rates in G7 nations very closely, had less positive news for the UK in its latest bulletin. It cut its forecast for full-year GDP from 0.6% to 0.5% while inflation is expected to average 2.5%.

There was more positive news for next year with GDP growing by 1.5% as disinflation allows an easing of monetary conditions which will in turn lead to an increase in real incomes.

The UK ranks sixth in the G7, with Germany training in last place.

A spokesperson for the Treasury showed that the country is winning its fight against inflation and, with the IMF predicting that it would fall faster than had previously been expected.

The one great unknown for the economy will be the General Election that will take place later in the year. Although the Labour Party is still well ahead in opinion polls, as constituencies in the “Red Wall” return to Labour due to the failure of the Government’s levelling up policy, the result may be closer than predicted.

The pound continued its path lower as the dollar index continued to be driven by the prospect of interest rates staying “higher for longer”. It fell to a low of 1.2405 yesterday and closed at 1.2426. There are signs that the dollar is well into overbought territory, and its rise may slow down over the rest of this week.

Members of the FOMC continue to give advance guidance to the market over the predicted cut in interest rates.

The message has finally been received “loud and clear” and has seen the dollar rise to levels not seen since the final quarter of last year.

Fed Vice Chairman, Philip Jefferson, added his voice yesterday, commenting that the central bank’s key rate may have to remain at its peak for a while to bring down persistently elevated inflation.

He agreed that inflation is expected to slow this year, but it remains to be seen if the price fall will be sufficient for the FOMC to consider a series of rate cuts.

His speech was more hawkish than the last time he addressed reporters in early February. He omitted any reference to future rate cuts being “baked-in”. Instead, he said his outlook is that inflation will cool even with the Fed’s key rate “held steady at its current level.”

This was another example of a member of the FOMC reacting to the slowing rate of fall in inflation.

A rate cut in the current quarter is now firmly off the table with most, if not all members of the committee falling into line behind Fed Chairman Jerome Powell who is one of the few who has retained his overtly hawkish stance ever since he announced that the cycle of rate cuts would come to an end.

The next meeting of the FOMC will take place three weeks from today, and the market has already begun to gear itself up for a more hawkish statement, possibly cutting the number of cuts expected this year.

In its latest bulletin, the IMF has predicted that the U.S. will grow at twice the rate of its nearest G7 partner this year, although it did mention its concerns over ballooning public sector debt.

Its forecast for full-year GDP was raised sharply from 2.1% to 2.7%, but it predicts that inflation will remain above the Fed’s target, averaging 2.5% and only falling to 17% in 2025.

The U.S. is in a similar position to the UK as political uncertainties stay, with the outcome of the Presidential far more unsure, as long as Donald Trump can stay out of prison.

The dollar is now in a medium-term upswing, but it is likely to need to see a mild correction before it can push on towards resistance at 106.80. Yesterday it reached a high of 106.51 and closed at 106.36.

Christine Lagarde reined in expectations of an imminent rate cut when she spoke to reporters yesterday. As expected, she was unable to commit to a rate cut taking place at the June meeting of the ECB’s Governing Council, saying that a cut in rates is “on the horizon”.

Germany is unlikely to be able to make a positive contribution to the overall Eurozone GDP as, in its latest bulletin, the IMF placed the region’s largest economy firmly at the bottom of the G7 league table.

The Fund predicted that Germany will only see growth of 0.2% for the whole of 2024, significantly lower than the January estimate of 0.5% The country has systemic issues heavily linked to its reliance on energy-hungry heavy industrial output which is being rapidly eclipsed by China.

In a speech recently, a leading CEO in the software sector said that he believes that Germany will depend on China for decades.

Ronald Busch, who was part of the group that accompanied the German Chancellor, Olaf Scholz, on an official visit to Beijing this week, bemoaned the fact that his company had so far been unable to gain entry into the Chinese renewable energy sector.

It was ironic that on the day that the IMF again downgraded Germany’s economic outlook Lagarde spoke of her belief that Germany has “turned a corner” having been rocked by a series of shocks in recent years.

France also suffered at the hands of the IMF yesterday when it cut the outlook for French GDP this year from 1.7% to just 0.7%.

In the euro area, growth will pick up this year, but from very low levels, as the trailing effects of tight monetary policy and past energy costs, as well as planned fiscal consolidation, weigh on activity, the IMF said in its report.

Household budgets will improve, as will real wages, as energy costs decrease, and disinflation continues.

It also predicted a more significant pickup in activity in the Russian economy over the rest of this year.

It had predicted 2.6% growth for Russia in January and now foresees 3.2%. Its growth in 2025 is expected to be 1.8%.

Experts have pointed to Russian military spending, which has helped boost production since the war in Ukraine began.

The Euro continues to suffer from the assumption that the ECB will “go it alone” by cutting interest rates in June.

It fell to a low of 1.0601 yesterday after having attempted to rally, reaching 1.0653, but fell back to close at 1.0618.

Have a great day!