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London’s Economy Today editorial – October 2023

UK inflation fails to fall in September

Office for National Statistics (ONS) data that was published this month showed inflation didn’t fall in September. Consumer Price Index (CPI) inflation remained at 6.7%, unchanged from August (Figure 1). Most economists had expected a small drop in September’s inflation figure. The ONS noted that the biggest downward contribution to inflation “came from food and non-alcoholic beverages, where prices fell on the month for the first time since September 2021, and furniture and household goods, where prices rose by less than a year ago”. While, “rising prices for motor fuel made the largest upward contribution to the change in the annual rates”.

Figure 1:

Core inflation which omits energy, food, alcohol and tobacco prices did however drop slightly to 6.1% in September, down from 6.2% in August; economists had also expected this measure of inflation to drop by more. And another measure of underlying inflation, Services CPI inflation, rose in September to 6.9% up from 6.8% in August. Still the cut on the cap on household energy prices and more favourable year on year comparisons should see inflation falling in the coming months.

The September inflation figure is important for many people claiming benefits, with some such as disability benefits having to increase by law by this rate in April next year. However other benefits such as universal credit usually increase by this rate but this is at the discretion of ministers.

Looking forward the International Monetary Fund (IMF), in their latest World Economic Outlook, forecast that UK inflation will fall back next year. They expect average UK consumer price inflation to stand at 3.7% in 2024 down from an average of 7.7% this year and 9.1% in 2022. However, the forecast for inflation in 2024 in the UK was the highest of any of the G7 economies.

Despite inflation not falling this month most economists expect the Bank of England to hold interest rates at their current level at their next meeting in November. The Bank’s Monetary Policy Committee (MPC) was split in their October vote with five members of the MPC voting to maintain rates at their current level and four voting to raise rates. Looking at the impact of the current level of rates Dr Swati Dhingra, a member of the MPC, said that “the economy’s already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy”. With her adding “when you’re growing as slowly as we’re growing now, the chances of recession or not recession are going to be pretty equally balanced. So we should be prepared for that”. And that “it’s not going to be great times ahead”. She also noted that higher rates may impact on younger workers and those on lower incomes the hardest.

UK wages are rising faster than inflation

With inflation moderating over recent months annual average nominal pay growth (excluding bonuses) overtook inflation for the first time in two years. In the three months to August 2023 this figure stood at 7.8% which was higher than average inflation for the same months. There were however differences between the average wage growth of the public and private sectors. In the private sector this stood at 8.0% between June and August 2023 which was among the highest recorded growth rates seen by the ONS outside of the pandemic period. However, public sector pay increased by 6.8%. This was however the highest increase seen since records began in 2001.

Despite wages on average now rising faster than inflation pressures on households’ finances are likely to remain for some time yet. Consultancy firm Cornwall Insights forecast that energy bills for a typical UK household could increase by £73 in January. It expects that the Ofgem price cap for a typical household will be increased to £1,996 in January. This expected increase was put down to a rise in wholesale energy prices.

The housing market also remains a source of rising costs to many households. This was shown again by ONS data which found that UK private rental prices increased by 5.7% on average in the year to September 2023. This was the largest increase since records began in January 2016. For London this increase was even higher with rental prices increasing by 6.2%, the highest rate since London records began in January 2006 (Figure 2).

Figure 2:

UK economy returns to growth in August

ONS data published this month showed that the UK economy returned to growth in the month of August. GDP increased by 0.2% in August compared to a downwardly revised fall of 0.6% in July (Figure 3). However, looking at the contributions to this growth by the main sectors of the economy only the services sector saw growth, of 0.4%, while output in the production and construction sectors declined, by 0.7% and 0.5% respectively during August. Even in services some sectors saw a decline in output with consumer facing services falling by 0.6% in August after falling by a downward revised 0.2% in July.

Figure 3:

The IMF have however produced relatively gloomy forecasts for the UK in their latest World Economic Outlook forecast. They expect the UK to grow by just 0.5% in 2023 and 0.6% in 2024. This was a slight 0.1 percentage point (pp) upgrade on their last forecast for 2023 which they produced in July but a downgrade of 0.4pp on their 2024 forecast for the UK. The 2024 forecast for the UK is the slowest growth of any major advanced economy. The IMF said that the UK growth rates “reflects tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices”. Government sources however claimed that the IMF forecast had not taken into account revised ONS data for UK growth. This data now shows the economy has grown by 1.8% since the start of the pandemic rather than a previously estimated 0.2% decline.

UK government has little fiscal room for manoeuvre

The Autumn Statement is due to take place next month. Looking at the state of the public finances in advance of the Statement the Institute for Fiscal Studies (IFS) published their Green Budget in October. In their analysis the IFS found that public borrowing could reach £122bn, 4.7% of GDP, this year. Although this is below the Office for Budget Responsibility’s (OBR) forecast from March 2023 at the time of the Budget for this fiscal year, the IFS forecasts higher borrowing in future years than was forecast by the OBR. Commenting on this Paul Johnson, the director of the IFS said “the price of our high levels of indebtedness, failure to stimulate growth, and high borrowing costs is likely to be a protracted period of high taxes and tight spending”. Rising government borrowing is being driven by higher debt interest payments which have risen to 4.4% of GDP and is expected to remain above 3% of GDP in the medium term. The IFS did however note that the UK is on course to register a large fiscal surplus by 2027-28, but that this includes a six-year freeze in personal tax allowances and thresholds and implied cuts to most public service spending.

The Resolution Foundation has also been examining the impact of frozen tax thresholds. Their research found that by 2028 taxpayers will be paying £40bn a year more due to the freeze on the income tax and National Insurance thresholds. Meanwhile, the think tank Reform has been looking at UK government spending and found that it is not sufficiently tied to government priorities. The performance of critical projects struggles to stay on track due to civil service inefficiency. Reform called for every department to appoint a named individual in their executive team to oversee performance information and for the Cabinet Office to create a task force to set and measure project and policy performance.

A mixed picture for the world economy

Despite a relatively subdued forecast for the UK economy the IMF is more upbeat for the world economy. It noted that the “the resilience [of the global economy] has been remarkable”. It also observed that “inflation—both headline and underlying (core)—is gradually being brought under control” with projections “increasingly consistent with a “soft landing” scenario for the world economy.

However, the IMF has also warned of threats to global financial markets due to rising bond yields. Tobias Adrian, director of the IMF’s monetary and capital markets department is quoted by the Financial Times as saying “when you see large moves that are very fast, it has more potential to trigger instability, because market participants have to reposition and there are these accelerators in the system that could kick in”.

Elsewhere concerns have been rising about the Chinese property developer Country Garden. The company is believed to have defaulted in October on its overseas debt. The firm has $11bn in debt and another $6bn in onshore loans. If it has defaulted this would lead to one of China’s biggest corporate debt restructures. China has also announced a number of measures to boost housing demand. However, data indicates property investment in China declined by 9.1% in the first nine months of the year.

London retains second place in global financial markets ranking

The latest Global Financial Centres Index from Z/Yen Partners and the China Development Institute found that London retained its second place in the rankings of 132 financial centres examined. It maintained its slight lead above Singapore in third place, but still lags behind New York, although the gap between the two cities rankings has narrowed slightly.

Elsewhere data from the commercial real estate research company CoStar showed that vacancies in both London and the US reached 20-year highs as the commercial real estate market continues to react to the fallout from the pandemic, and continued hybrid working. Further, as shown in the indicators section of this publication, consumer confidence in London again turned negative this month after being positive for the previous two months. Still, the Government did confirm this month that the stage of HS2 to Euston will go ahead if private funds are available for it.

The ONS has also published international tourism statistics up to 2023 Q2. London’s recovery as a destination continues with the number of visits in this quarter at 5.3m just 1% below the corresponding pre-pandemic figure for 2019 Q2. There has, though, been a significant shift in the origin of tourists, with numbers from North America rising by 35%, those from Europe falling by 7%, and from other countries by 16%. As a comparison, all visits to the UK remain down by 5%.

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