The week ahead 20 January 2025 - Mixed data increases chance of a rate cut
What to watch out for in the UK economy and property market this week.
The likelihood of a base rate cut in February increased last week following a mixed set of economic data. Inflation slowed from 2.6% in November to 2.5% in December, defying forecasts of no change. GDP returned to growth in November at 0.1% month-on-month, up from -0.1% in October, although City analysts were predicting 0.2%. Also, the December retail sales figures were disappointing, with volumes declining month-on-month by -0.3% compared to a consensus forecast of a 0.4% rise. Supermarkets had a difficult December, although clothing retailers reported a rebound in sales.
The overall picture is one of a slowing economy, which justifies a lower base rate. With gilt yields rising on higher inflation expectations in recent weeks, a base rate cut was looking less likely. But in our opinion the latest inflation and GDP figures have moved the pendulum towards the Bank of England loosening policy with a 25 bps reduction at its upcoming February meeting. In fact, one Monetary Policy Committee member, Alan Taylor, gave a speech last week suggesting 2025 could see rates fall by 125-150 bps. That is well above the 50 bps the swaps market is currently pricing in.
Last week saw the government hold two successful gilt auctions, with each sale three times oversubscribed. This could be a sign stability is returning to the gilt market.
The UK government announced an initiative to boost growth for the UK’s artificial intelligence industry last week, which was accompanied by £14 billion of private sector investment. It is estimated that since July 2024, UK AI has seen around £39 billion of private capital invested. This is encouraging news from a property perspective, as data centres are an area of growing interest in the industrial market, while tech occupiers have been active in the office leasing market.
This week sees the publication of labour market statistics for the UK. The Bank of England will be focussed on the numbers for pay growth, looking for reassurance that there is no evidence of a wage-price spiral. For all major economies the early ‘flash’ PMI figures will be released on Friday. The convention of the index is that a reading of over 50 indicates growth for the commercial side of the economy. The UK PMI lately has been polarised, with the services sector over 50 but manufacturing below; resulting in a composite figure that is only marginally above 50. Given the general picture of a slowing economy at present, we are expecting the PMI to once again decline slightly, but manage to remain just above the pivotal 50 mark.
This week's figures
TUESDAY 21 JANUARY
UK Average Earnings Growth, y-on-y, November
5.2% previous
5.0% forecast
With most other indicators pointing to a slowing economy, we are forecasting pay growth decelerated in November. However, growth will pick up again in April when the minimum wage increases.
FRIDAY 24 JANUARY
GfK Consumer Confidence, January
-17 previous
-19 forecast
Given the level of negative commentary in the media on the economy lately, we believe consumer confidence has probably softened in January.
UK Composite PMI, January
50.4 previous
50.2 forecast
As with previous months, we are expecting growth in the services sector to outweigh the difficult conditions for manufacturing, resulting in another marginally above 50 reading for the UK composite PMI.
