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The week ahead 14 August 2023 - UK growth more resilient than expected, but still subdued

14 August 2023

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

The Q2 UK GDP figures showed growth of 0.2% q-on-q, which was better than the 0.1% expected by forecasters but half the long-term average figure of 0.4%. The sectors that drove growth were information and communication, food and accommodation, and healthcare. Within information and communication, the strongest performing industries were TV, video game and film production and computer programming, highlighting the growing importance to the UK economy of creative and technology firms. The Office for National Statistics speculated that the strong performance for food accommodation services reflected good weather and more live events in June. The manufacturing sector also had a good quarter, partly thanks to the automotive industry.

Judging the GDP figures in many ways come down to whether you are an optimist or a pessimist. The optimist would note the UK continued to grow in the face of rising interest rates, plus numerous strikes and an extra bank holiday. Some of the industrial disputes have now been settled, so this factor will weigh less on the Q3 numbers. The pessimist would point out that the full impact of the interest rate hikes to date have yet to reach the economy. The base rate in our opinion has at least another 25 bps further to rise, although that is priced into market interest rates. Indeed, last week saw banks once again cut rates on many mortgage deals. Our forecast is that the second half of the year will probably resemble the first half – tepid growth as the benefits of less strike action and falling inflation are partially reversed by the dampening effect of higher interest rates. This could though provide the stable backdrop necessary for the property investment market to level off.

This week the Bank of England Monetary Policy Committee (MPC) will find out if they were justified in not going for a 50 bps base rate hike earlier this month, as UK inflation and labour market data is to be released. The Bank will be focussed on core and services inflation and hoping to see internally generated UK inflation is continuing to decelerate. Similarly, the MPC will be closely watching the pay growth data seeking reassurance that the figures have now peaked, thus reducing the risk of a wage-price spiral.

Things to watch for this week

Tuesday 15th August

UK Average Earnings Growth, y-on-y, June

Previous: 7.3%
Forecast: 6.7%

With inflation falling and unemployment rising, we are forecasting pay growth to have moderated in June.

Wednesday 16th August

UK CPI inflation, July

Previous: 7.9%
Forecast: 7.4%

We believe that receding pressures from food and fuel pushed down headline inflation again in July, although the Bank of England will be closely watching the core and services inflation figures for any signs of second round effects.

Euro Area Industrial Production, m-on-m, June

Previous: 0.2%
Forecast: -0.6%

Following a sharp fall for German industrial production of -1.5% in June, it is very likely the Euro Area figure will also decline.

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