The week ahead 17 July 2023 - Mixed signals from the UK labour market

What to watch out for in the UK economy and property market this week.

Last week saw the pound rise after strong nominal pay growth data encouraged speculation that the UK base rate would rise again soon. Sterling hit US$1.31 on Thursday, having started July at $1.27. Debt markets priced in a higher base rate, and according to Money Facts the average two-year fixed mortgage rate is now close to 6.7% - exceeding its peak during the aftermath of last year’s ‘mini budget’. However, while pay growth was strong, there were signs of weakness emerging in the labour market, such as the unemployment rate rising from 3.8% in April to 4.0% in May. Turning to the UK GDP data, the month-on-month fall in output by -0.1% in May was not as bad as expected, and partly due to the coronation bank holiday. However, the figures paint a picture of an economy struggling to grow in the face of multiple headwinds, including strikes, higher interest rates and sticky inflation. 

In contrast, US equities rallied last week as news that inflation had fallen to 3.0% raised hopes that the Fed might not need to raise rates as high as previously feared. This could offer some relief to other international economies, as the Fed hiking rates puts pressure on other central banks to do the same to prevent currencies sliding in value, thus importing inflation. The question now is: has the Fed raised rates enough to bring down inflation, but without tipping the country into a recession. Capital Economics is predicting a mild US recession on the basis that not all the impact of the interest rate increases up to now has reached the economy. While sympathetic to their view, we would add that the US economy has held up better in the last year than anyone expected. That resilience is not yet showing much sign of fading, so a brief period of stagnation not outright recession might be a possibility. 

This week sees inflation figures for the UK, and if there is another disappointment it will ramp up pressure on the Bank of England and Downing Street – as this would throw into doubt the government’s stated objective of halving inflation this year. Also, UK retail sales data will be released giving some indication of the extent to which higher interest rates are dampening the wider economy. 

Things to watch for this week

Wednesday 19th July

UK CPI Inflation, June 

Previous: 8.7%
Forecast: 8.2% 

We expect to see weakening fuel prices push down inflation at the headline level, but are also forecasting core inflation to remain unchanged on May’s figure of 7.1%. 

Thursday 20th July

Euro Area Consumer Confidence, July 

Previous: -16.1
Forecast: -16.2 

With the consumer hit by opposing pressures of falling inflation but rising interest rates, we expect the index to show little monthly change. 

Friday 21st July

UK Retail Sales Volume, June 

Previous: 0.3% m-on-m
Forecast: -0.1% 

The May figures were buoyed by sales of clothes and outdoor goods, so we suspect most consumers have done their summer shopping resulting in a modest decline in June.