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London’s Economy Today editorial – January 2024

UK inflation ticks up in December

UK inflation surprisingly increased in December according to data published by the Office for National Statistics (ONS). Consumer Price Index (CPI) inflation ticked up to 4.0% in December 2023 from 3.9% in November (Figure 1). This was the first time the rate had increased since February 2023 and had not been expected by most commentators.

Figure 1:

The ONS observed that “the largest upward contribution to the monthly change in … CPI annual rates came from alcohol and tobacco while the largest downward contribution came from food and non-alcoholic beverages”. Though it further observed that the increase in the annual rate of alcohol and tobacco inflation was “largely the result of the increase in tobacco duty, after the government announced higher taxes in their autumn statement”.

Of the components of inflation most were steady or increasing or only saw a marginal fall such as goods inflation which fell from 2.0% in November to 1.9% in December. However, services inflation increased slightly (from 6.3% in November to 6.4% in December) and the core inflation rate (which excludes volatile energy, food, alcohol and tobacco) stayed steady at 5.1%. These also remain higher than CPI inflation and markedly higher than the Bank of England’s target of 2% inflation. Still analysts expect inflation to drop in the coming months in part due to a forecasted fall in the energy price cap that is expected in April.

UK GDP grew in November

In more positive economic news the ONS estimates that UK GDP returned to growth in November. After falling by 0.3% in October UK GDP is estimated to have then grown by 0.3% in November (Figure 2). Despite this monthly growth GDP in the three months to November 2023 fell by 0.2%. Still, output in both services and production grew by 0.4% and 0.3% respectively, with services growth contributing the most to the growth in UK GDP. However, it should be noted that output in construction fell by 0.2% in November.

Figure 2:

Looking at the last month of 2023 the picture is less optimistic. Data from the ONS showed that retail sales in Great Britain fell more than expected between November and December 2023. The fall was 3.2% compared to a rise of 1.4% in the previous month. Further, although a fall had been expected by most economists, this was greater than most had anticipated but may have been affected by consumers bringing forward spending to take advantage of deals such as Black Friday. This picture of a poor retail performance was also supported by data from the British Retail Consortium (BRC) which, although increasing, showed sluggish growth in retail sales in December. The data showed that sales grew by an annual rate of 1.7% in December, lower than the 2.7% seen in November and below the 12-month average of 3.6%. Commenting on the figures Helen Dickinson, chief executive of the BRC said that “weak consumer confidence continued to hold back spending”.

The Q3 2023 Quarterly Economic Survey (QES) from the British Chambers of Commerce (BCC) also had mixed results for the end of 2023. It found that “most firms report no increase to sales, cash flow, or investment”. However, it also noted that business confidence was improving with David Bharier, Head of Research at the BCC observing that “the latest QES results show steadily growing confidence among UK SMEs, particularly compared to this time last year, when the UK was beset by a significant energy price shock and political instability”. Of concern for surveyed businesses, the report found that inflation remained “the top external factor of concern for the majority of respondents (58%), though this has declined significantly from the peak of 84% in Q3 2022”.

World economy forecast to experience weakest half decade in 30 years

A subdued economic outlook is not just seen in the UK as shown by the latest economic forecast from the World Bank. The World Bank forecast in January in its Global Economic Prospects report that global growth would “slow for the third year in a row—from 2.6% last year to 2.4% in 2024, almost three-quarters of a percentage point below the average of the 2010s”. Global trade growth this year is also expected to be only half the average seen in the decade before the pandemic. Commenting on the forecast, Indermit Gill, the World Bank’s Chief Economist and Senior Vice President said “without a major course correction, the 2020s will go down as a decade of wasted opportunity”. The report also warned that the conflict between Hamas and Israel “has sharply heightened geopolitical risks”, while disruption to shipping routes through the Red Sea has increased inflationary bottlenecks.

Elsewhere Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF) warned markets to not expect interest rate cuts too soon. In an interview in Davos she said “based on the data we have seen, we would expect rate cuts to be in the second half, not in the first half” of the year. This came as other financial leaders also tried to dampen expectations of imminent rate cuts. So for instance the president of the European Central Bank, Christine Lagarde, has indicated that rate cuts would not be likely until the summer but that she would “have to be reserved” on her judgement of the timing of the cut.

Overseas visitors spending drops in the UK

The Financial Times (FT) recently undertook analysis looking at non-EU visitor spending in the UK in the period prior to and after the scrapping of VAT free shopping post Brexit in 2021. This analysis found that in 2021 non-EU visitor spend stood at £1,612 per capita up from £1,036 in 2020 after Covid bans on flights were lifted. It then observed however that “in 2022, as visitor numbers approached pre-pandemic levels, the figure decreased to £1,346 — or 17 per cent — and maintained a declining trend for the first six months of 2023”. The analysis noted that this trend was not seen in other European countries with spending rising in Italy and Spain over the period and remaining flat in France in 2022 before then rising. More analysis on the impact on London of the end of VAT free shopping can be found in the supplement to the September 2023 edition of London’s Economy Today.

London sees strong growth in services exports

The Resolution Foundation has been looking at UK services exports in new research published this month. This found that services accounted for 56% of all UK exports in Q3 2023 compared to 30% in 1997. They also noted that London’s services exports had grown strongly recently, with the capital’s services exports increasing by 47% between 2016 and 2021 to reach a value of £152.2 billion. Given this fast growth London’s share of all UK services exports had increased from 38% to 46% between those years. Looking at the causes of this big growth in the capital’s services exports the Resolution Foundation observes that “the biggest export growth was seen in [information and communication services] (up 15 per cent between 2016 and 2021), and professional services (up 12 per cent), rather than banking (up 8 per cent)”.

Gross disposable income in London more than £10k less than it could have been

The Centre for Cities has published a report in January looking at the performance of UK cities since 2010. In its Cities Outlook 2024 report it observed that “no part of the UK has escaped the impact of the flatlining of the UK economy since 2010”. While looking at the capital the report found that “gross disposable income growth per head was £13,590 lower in London than it would have been if it had grown in line with 1998-2010 trends”. Although it should be noted that London was the only analysed city that saw disposable income grow more than the national average. Beyond this the report further observed that “London’s productivity slowdown since 2008 is a big factor in the wider national malaise” and thus argued that “to get the UK economy firing again the next government must overcome the reluctance to support London”. In order to boost growth going forward the report argued that the next government should stick with the levelling up agenda, pass “fiscal powers to London, Greater Manchester and the West Midlands, while addressing funding challenges faced by local government” and reform the planning system.

AI could affect 40% of jobs globally

Looking further ahead the IMF recently produced analysis on the possible impact of artificial intelligence (AI) on the future of work. It found that 40% of global employment is exposed to AI. It noted that unlike in previous periods of automation high skilled jobs could be highly impacted, so, in advanced economies it thinks that 60% of jobs are exposed to AI. It further observed that “advanced economies face greater risks from AI—but also more opportunities to leverage its benefits—compared with emerging market and developing economies”. Of the 60% of advanced economy jobs exposed it thinks that around half “may benefit from AI integration, enhancing productivity”, while the other half are at risk of replacement. The IMF also warned that AI may negatively impact inequality with Kristalina Georgieva, the IMF’s managing director, saying “in most scenarios, AI will likely worsen overall inequality”.

London and the UK face some challenges moving into the new year

There was continued signs of a slackening in the London labour market at the end of the year. Thus, early estimates from the count of payrolled employees from HMRC’s Pay As You Earn (PAYE) RTI dataset, which offers a timely measure of labour market trends, indicate that there were around 4.3 million payrolled employees living in London in December 2023, a decrease of around 2,610, or 0.1%, on the previous month. Although this was an increase of 41,000, or 1.0%, on the previous year. Looking at the claimant count, which is a measure of people claiming benefits principally for the reason of being unemployed, it shows that in December 2023 there were 306,000 people claiming unemployment-related benefits in London – equal to a claimant unemployment rate (as a proportion of residents aged 16 to 64) of 5.1%. The number of claimants in London has increased by 20,900, or 7.3%, on the year, compared to an increase of 31,800, or 2.1%, in the UK overall. The indicators section of this publication looks at further measures of the labour market.

Beyond the labour market and taking a more national view, some councils are facing very large debt levels. As reported in previous editions of London’s Economy Today, a number of councils have issued section 114 notices meaning effectively they have gone bust. However, this may be the tip of problems faced by councils as new BBC analysis has shown that UK councils owe a combined £97.8bn to lenders, equivalent to around £1,400 per person. It should however be noted that the picture between councils varies widely with around 10% of councils having no debt at all.

The UK is also expected to implement post Brexit border checks on goods entering the country from the EU from 31 January, which may also put pressure on British supply chains. These checks have been postponed five times and it is possible that the move to this new system may cause some disruption as the system is implemented.

GLA Economics will continue to monitor these challenges over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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