News that the UK economy rebounded towards the end of last year added to positive economic data from the US to boost market sentiment throughout January.
Market sentiment received a boost in January after data showed the UK economy rebounded by 0.3% in November, although the spectre of a recession still casts its shadow. In an unexpected turn, UK inflation climbed to 4% in December, tempering optimism about potential interest rate cuts by the Bank of England in the upcoming months. The jump from the previous month’s rate of 3.9% was largely attributed to a government-imposed hike in tobacco duty. Core inflation held steady at 5.1%.
Against the backdrop of a sluggish job market, UK pay growth fell once again, dropping from 7.3% to 6.6% in the three months leading to November. The number of job vacancies fell by 49,000 in the three months leading to December to 934,000, marking the 18th consecutive period of decline. Retail sales volumes dropped 3.2% in December, down from a rise of 1.4% the month before – the worst performance for the retail sector since January 2021.
While a rebound in house prices still looks unlikely in 2024, the market is looking more positive. UK house prices rose by 0.7% in January on the previous month, their strongest rate in a year, according to Nationwide. At the beginning of February, the Bank of England announced rates would remain at 5.25%.
The US economy remains robust
The month got off to a shaky start after an unexpected jump in inflation and mixed corporate earnings results, but markets soon picked up, bolstered by rising hopes about the US economy. There was also an increase in crude oil prices over concerns about potential disruptions to oil supplies through the Red Sea and escalating tensions in the Middle East.
The US Federal Reserve (Fed) held its target benchmark interest rate in a range between 5.25% and 5.5% – a 23-year high. Fed Chairman Jerome Powell said it was unlikely interest rates would be cut at the central bank’s next meeting in March with inflation still running above the 2% target. Policymakers are carefully considering when to begin reducing borrowing costs to improve the chances of achieving a soft landing, where price growth moderates and recession is avoided.
US inflation rose at an annual pace of 3.4% in December, up from the previous month’s 3.1%. Core inflation, which strips out volatile food and energy prices, slowed from 4% to an annual rate of 3.9%. Despite the December uptick, analysts expect inflation to fall in the months ahead.
The US economy continues to defy expectations of a slowdown, with the labour market appearing robust as the year began. In December, employers added 216,000 jobs, and the unemployment rate remained unchanged at 3.7%. Retail sales also exceeded expectations, rising by 0.6% in December. Growth has been stronger than expected, with the economy expanding at an annual rate of 3.3% over the three months to December.
China’s economic woes continue
China’s economic challenges worsened in January, with the manufacturing sector contracting for the fourth month in a row. The country’s deflation worries deepened, with consumer prices falling for the third consecutive month in December.
Despite government efforts to stimulate the economy, China’s property problems intensified, marked by the fastest fall in new home prices since February 2015 – extending the streak of monthly drops to six. New home prices suffered a 0.4% month-on-month decrease, following a 0.2% dip in November.
There was a glimmer of positive news for the world’s second-largest economy, as exports showed a 2.3% increase in dollar terms compared with the previous year, accompanied by a 0.2% rise in imports. Persistent deflationary pressures, struggling consumer demand and a property slump proved to be major challenges in 2023, spurring the authorities to roll out more stimulus measures and rate cuts to boost growth.
European central bank holds rates
European markets gained ground following the European Central Bank’s (ECB) decision to maintain interest rates at a record-high 4%. Eurozone inflation rose in December, reaching 2.9%, up from 2.4% the previous month. Europe’s labour market continued to show resilience, with unemployment dropping to a record low of 6.4% in November.
The eurozone economy faced another bout of stagnation at the close of the previous year, narrowly avoiding a recession after the region’s economic activity remained flat. The final quarter of the year recorded zero growth, following a slight economic contraction of 0.1% in the third quarter.
The poor performance was mainly down to Germany, whose economy has struggled in the wake of the energy crisis. While Germany has so far managed to avoid recession, its economy appears to be stuck in a rut. Europe’s biggest economy shrank last year for the first time since the pandemic, contracting by 0.3% as persistent inflation, energy prices rises and interest rates hit growth.