13 December 2024: October GDP is likely to show a minimal gain

The data for GDP in October will be published later this morning and although the numbers will be positive, they will surely be a disappointment for the Government. The economy is predicted to have grown by just 0.1% in the first month of the year’s final quarter.

Services activity likely inched higher in October, but only just, while manufacturing output remained in negative territory.

Meanwhile, consumer confidence is still stifled by uncertainty and the effects of the Budget.

GfK’s long-running Consumer Confidence Index increased by one point to minus 17 in December as forecasts for personal finances moved into positive figures at one, three points higher than this time last year.

The Major Purchase Index, an indicator of confidence in buying big-ticket items, also remained unchanged at minus 16, although this is seven points higher than a year ago.

Although confidence is improving, the pace of the recovery is being hampered by the perception that more needs to be done to support several sectors of the economy. The campaign by farmers to have the changes to inheritance tax reversed has, by and large, been supported by the public, while the means testing of the pensioners’ winter fuel allowance is still causing anger.

Improvements need to happen in these beliefs of the economy before we can start talking about sustained improvements in the consumer mood. The uncharitable view of the UK’s general economic situation suppresses consumer confidence.

Following the Prime Minister’s visit to the Gulf, the UK and Saudi Arabia, the two countries have taken significant steps toward strengthening their cultural and economic partnerships, marking what the Government is calling a new era for relations between the two nations.

“Through stronger economic ties with partners such as Saudi Arabia, we can tap new growth opportunities at home and abroad, which are particularly important for working people back in the UK.” the Prime Minster commented.

According to the Guardian newspaper, the Monetary Policy Committee is making ill-informed decisions about the country’s employment situation due to a defective jobs survey.

The Chair of the Office for National Statistics has written to the Treasury Select Committee, telling its members that his hopes for introducing new, more accurate data in 2026 will now be delayed until early 2027.

The labour force survey constitutes the UK’s official record of unemployment, but response rates to the monthly survey have plunged in recent years, raising questions about its reliability. Until a prompt response is made mandatory, the ONS will struggle to provide accurate and timely data.

The Bank of England’s Monetary Policy Committee will meet for the final time in 2024 next week and can look back on a year in which they have contributed to a significant fall in inflation. The committee is expected to leave rates unchanged, since they are still uncertain of the effect of the Budget on consumer prices.

The pound fell to the bottom of its recent range against the dollar yesterday, making a low of 1.2667 and closing at 1.2769.

The door to a rate cut at next week’s FOMC meeting is not completely closed, despite the slight rise in inflation last month and the Committee’s apparent reluctance to cut rates in a hurry.

The latest data marked two consecutive months of rising inflation, extending a bout of accelerated price increases that have reversed some of the progress made in lowering inflation earlier in the year.

Food prices rose 2.4% in November compared to a year ago, unchanged from the previous month and marking slower price increases than the overall inflation rate.

Prices fell in November compared to a year ago for an array of household staples like cereal, rice, flour, bread, bacon and seafood. However, the price of eggs soared more than 37%, as a result of an avian flu that has depleted the supply.

In recent months, the Fed has cut its benchmark rate by seventy-five basis points, dialling back its long fight against inflation and delivering relief for borrowers saddled with high-interest costs.

The market has priced in another twenty-five-point cut next week, but economists are not so sure.

Speaking at a press conference in Washington, D.C., yesterday, Fed Chairman Jerome Powell voiced optimism about the prospects for achieving a “soft landing,” in which the U.S. averts a recession while inflation returns to normal.

“We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and labour market can be maintained with inflation moving sustainably down to 2%,” Powell said.

The trajectory of inflation could shift in the coming months. Some economists expect President-elect Donald Trump’s proposals of heightened tariffs and the mass deportation of undocumented immigrants to raise consumer prices.

When asked about the Fed’s potential response to Trump’s policies, Powell said the FOMC would make its rate decisions based on how any policy changes impact the economy.

In November, headline producer prices rose by marginally more than the market had anticipated. “Factory gate” prices rose by 0.4% month-on-month and by 3% year-on-year, versus a prediction of 0.4% and 2.6%. This will also have given the FOMC some pause for thought.

Jobless claims also saw a significant rise. Climbing from a four-week average of 218.5k to 224.25K.

The dollar rallied significantly as the data further confused next week’s rate decision. It rallied to a high of 107.04 and closed at 107.01 as resistance around 106.80 was conclusively broken.

Data for manufacturing and services output for November will be published next week ahead of the FOMC meeting, while numbers of Q3 GDP will be released after the rate decision has been made, although it is certain that the Committee will have had sight of the data in advance.

The Governing Council of the ECB chose discretion over valour yesterday as it voted to cut its prime interest rate by twenty-five basis points. There had been some thought that the Council would agree to cut rates by fifty basis points to make a statement about their view of the seriousness of the region’s economy.

However, the fear of spooking the market into believing that the Central Bank feels that a recession is imminent led to a more moderate rate cut.

In a notable policy shift, the ECB abandoned its earlier rhetoric about keeping rates restrictive “as long as necessary,” while reiterating its commitment to a data-dependent approach for determining future monetary policy.

“The Governing Council is determined to ensure that inflation stabilizes sustainably at its 2 per cent medium-term target,” the bank said in its statement.

In its latest macroeconomic projections also released yesterday, the ECB forecasted slower growth for the euro area economy compared to its September projections, as indicators point to a slowdown in the current quarter.

The ECB projects the economy will grow by 0.7% in 2024, 1.1% in 2025, and 1.4% in 2026.

According to the projections, growth is expected to be driven by rising real incomes, which are anticipated to boost consumption and investment, although the market feels that any rise in investment will rely on a significant recalibration of output and productivity.

The ECB is now firmly in a phase of encouraging growth, as yesterday’s cut was the third at successive meetings and its fourth in the current cycle.

Europe’s tumultuous political backdrop loomed over the monetary policy decision taken by officials in Frankfurt on Thursday, according to Christine Lagarde.

While the European Central Bank president didn’t refer directly to the collapse of governments in both France and Germany in recent weeks, she observed that suspense about fiscal plans and electoral results isn’t helping her colleagues as they also wait for Donald Trump to take power in the US.

“A lot is going to be clarified, we hope, in the next few months,” Lagarde told reporters. “If there is one thing that we discussed in the last two days, it’s the level of uncertainty that we are facing, and whether it’s uncertainty resulting from political situations in some of the member states, or uncertainty resulting from the outcome in terms of policies of the US.”

Lagarde refused to refer to any European country while lamenting the clouded situation confronting policymakers.

“That is self-inflicted uncertainty that we have nothing to do with, but which is caused by the current political situations,” she said. “Elections are coming up in the first quarter of ‘25 and hopefully decisions being made much earlier than that for other member states.”

The euro tumbled through its short-term support level following the rate cut. It fell to a low of 1.0463 and closed at 1.0472.

Next week there is a heavy schedule of economic data, including purchasing manager’s indices, harmonized inflation data, and business confidence.

With monetary policy meetings in both London and Washington, the final full week of the trading year will see significant volatility as liquidity begins to dry up.

Have a great day!