Economic Monitor: Demand holds up at the end of 2023

Consumer sentiment improved once more, last month, and perceptions about economic conditions in the year ahead are becoming less pessimistic. This improvement was also reflected in services activity having rebounded in the last two months of 2023, with firms reporting better-than-expected consumer spending on leisure and hospitality services.

Elevated prices did not deter consumers from spending over the festive period, and recent Bank of England data suggest credit card borrowing helped buoy spending. With real wage growth expected to remain positive over H1 2024, this offers an upside to spending over the coming months. The physical quantity of retail goods bought is likely to remain subdued, however.

Whilst inflation has eased, upside risks remain, with supply-chain resilience being questioned by recent disruption in the Red Sea. Freight rates for containers travelling from the Far East to Western Europe have more than doubled in the space of a week, further highlighting the challenges associated with inflation returning to the 2% target. Immediate interest rate cuts hence are unlikely unless there is a substantial easing in headline CPI and or a dramatic deterioration in economic conditions.

• GDP fell in October by 0.3%, following growth of 0.2% in September. Services activity fell and the largest downward contributors were information and communication activities as well as professional scientific, and technical activities. Consumer-facing services also fell marginally, though the biggest upward contributor was wholesale and retail trade, in contrast, other personal service activities provided the largest negative contribution.
• Inflation fell in November and the Consumer Price Index eased to 3.9%. Of the headline rate, 1.1% emanates from food, 1.0% from restaurants and hotels and 0.7% from recreation and culture. Housing and energy costs are now pushing down on inflation, shaving off 0.5% from the headline figure. Fuel prices fell for both petrol and diesel, with these figures registered when petrol was £1.51 per litre and diesel £1.59. Inflation, over Q4 2023, is likely now to be slightly below the Bank of England’s forecast of 4.6%.
• The BRC-KPMG measure of retail sales rose to 2.7% in November, up from 2.5% in October.
• Average regular pay (excluding bonuses) was estimated at £620 per week in nominal terms (not adjusted for inflation), higher than the estimate for a year earlier (£583 per week) and £478 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£471 per week).