The week ahead 22 January 2024 - December retail sales disappoint
What to watch out for in the UK economy and property market this week.
Last week saw disappointing news on UK retail sales and inflation for December. Retail sales volume dropped by -3.2% month-on-month, following a rise of 1.4% in November. The consensus forecast was for a decline of -0.3% for December. In part, Black Friday probably pulled sales forward into November, but nevertheless the consumer has been squeezed lately by high interest rates. Meanwhile, inflation in December rose to 4.0%, compared to a forecast of a fall to 3.8%. One should only read so much into downbeat figures for just one month, but this is a reminder that we should not over do the optimism on the interest rate cuts that are widely forecast. The Bank of England is expected to cut rates because growth is weakening, and that too will have implications for the property market.
The International Energy Agency (IEA) released a report last week which predicted 2024 could see a “substantial surplus” of oil on the market due to higher production in non-OPEC countries, such as the US. The IEA is also forecasting slower growth for demand in 2024 than was seen in 2023, through a combination of a subdued global economy in H1 and increasing use of electric vehicles. From a UK perspective, this is bad news for the North Sea oil and gas sector but good news for intensive users of energy, such as logistics firms, airlines and manufacturers. It could also favour consumer-facing industries, as lower petrol bills for households will free up money to be spent elsewhere. Cheaper energy should also push down inflation further.
This week sees the release of the Q4 US GDP figures, which are widely expected to show a slowdown in activity; although this will help build the case for the Fed to at some point cut interest rates. Most major economies will see PMI figures released this week. Also, the ECB holds its rate setting meeting, and although no change is expected the markets will be hoping for clues on how far away the first rate cut is.
Things to watch for this week
Wednesday, January 24th
UK Composite PMI Index, January
Previous: 52.1
Forecast: 51.8
In the face of elevated inflation and high interest rates, we believe this business activity index probably weakened in January, but to a level that shows the economy is still growing, just at a slow pace.
Thursday, January 25th
ECB Rate Decision, January
Previous: 4.5%
Forecast: 4.5%
It is a near certainty that the ECB will leave its policy rate unchanged, but there will be a lot of interest in what is said at the press conference. The financial markets will be listening for clues on when rates will start to fall. We suspect the tone will be cautious.
US GDP, q-on-q annualised, Q4 2023
Previous: 4.9%
Forecast: 2.0%
Our forecast is for US GDP to have decelerated in the final quarter of 2023, partly due to the autoworkers strike and high interest rates. However, Q3 GDP at 4.9% was surprisingly strong, and the 2.0% we are predicting for Q4 is consistent with the figures seen in Q1 (2.2%) and Q2 (2.1%).
Germany Ifo Business Expectations, January
Previous: 84.3
Forecast: 85.0
Although the latest GDP figures (as anticipated) showed the German economy continued to shrink in Q4, we are forecasting improved expectations on the outlook due to weaker inflation and the growing expectation that interest rate cuts are coming.
