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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Lower UK government borrowing raises prospects of tax cuts
Lower than expected government borrowing last month has increased the possibility of tax cuts in the Budget, analysts say.
Borrowing - the difference between spending and tax income - fell to £7.8bn in December, the Office for National Statistics (ONS) said as interest payments dropped sharply due to a rapid decline in inflation.
Analysts said the latest figures could give the chancellor ‘more headroom’ for tax cuts, with the news breaking as Jeremy Hunt hinted that he wanted to cut taxes at the beginning of this year.
This has now raised expectations that he will seek to do so in the Budget in March, ahead of a general election expected later on this year.
December's borrowing figure was £8.4bn less than a year earlier, and the lowest figure for the month since 2019. Interest payments on government debt fell to £4bn, down by £14.1bn from December 2022. This was helped by the fall in inflation last year, with the government's interest payments linked to the Retail Prices Index measure of inflation.
The ONS data showed that borrowing for the nine months to December 2023 was £119.1bn. While that was £11.1bn more than in the same period the year before, it was lower than the amount forecast by the Office for Budget Responsibility (OBR).
Lower inflation has now also led to further expectations that interest rates will be cut at a faster pace than when the OBR made its last forecast in November.
Total debt - which is the overall amount of money owed by the government that has built up over years - was £2.67 trillion at the end of December.
That is the equivalent of 97.7% of the size of the UK's economy as measured by gross domestic product (GDP), remaining at levels last seen in the early 1960s, the ONS stated in its latest report.
Government borrowing has increased sharply in recent years. The government spent billions on measures to support the economy during the Covid pandemic, and then also subsidised energy bills when costs surged after Russia's invasion of Ukraine.
UK Retail sales fall at sharpest rate since Covid
Retail sales volumes fell by 3.2% in December in the sharpest drop since the UK was in the midst of a Covid lockdown.
Official figures revealed a sharp fall in demand for goods, but food sales also declined in the run-up to Christmas. The Office for National Statistics (ONS) said it appeared people did their shopping earlier in November, taking more advantage of Black Friday sales.
It meant that retail sales across the UK tumbled at the fastest rate since January 2021. The ONS stated the amount of non-food products people bought in December fell by 3.9%, with department stores the worst hit as a result.
This value compares to a 2.7% increase for non-food products in November. Food demand was also down at the end of the year, falling 3.1%. In November, food sales rose by a further 1.1%.
While the observed fall was the biggest since January 2021, when further Covid restrictions were enforced, the actual volume of goods that people bought in December was the lowest since May 2020 when the country was in the midst of the first Covid lockdown.
Supermarkets have recently been reporting strong sales over the Christmas period, although the value of their sales has been helped by the rising prices over the past year.
Alongside these latest figures, the UK economy shrank by 0.1% between July and September. It contracted again in October but bounced back in November. Inflation has fallen sharply since the highs reached in October 2022.
However, the most recent inflation figures showed that the rate edged up to 4% in December against widespread expectations that it would continue to fall. Economists and financial markets had forecast that the Bank of England would cut interest rates this year, possibly in the spring, as a result.
However, the recent inflation figures suggest that a cut may not be made until June. Interest rates are currently at 5.25%
US property sales see worst year since 1995
Home sales in the US sank to the lowest in nearly 30 years, as a sharp rise in interest rates increased costs for buyers and discouraged many potential sellers with lower rates from looking elsewhere.
Just 4.09 million homes were purchased, the fewest since 1995, as supply issues pushed prices to a new record, the National Association of Realtors stated. The organisation said it expected the market to improve in 2024, but it also warned that affordability would continue to remain a core issue.
The median house sale price in 2023 climbed 1% over the year, to $389,800 (£307,625), according to the NAR, which publishes the widely tracked report on sales of existing homes, which account for the bulk of purchases in the US.
The median price has jumped more than 40% since 2019, after a surge in prices during the pandemic. The housing market in the US has slowed abruptly since 2022, when the Federal Reserve started raising interest rates in a bid to curb inflation.
Last year, US mortgage rates, which are usually fixed for a 30-year period, rose rapidly above 7% for the first time in decades.
The moves ended an apparent buying frenzy that had erupted during the pandemic, when the central bank had slashed rates to boost the economy.
Unlike in other countries, where loans with shorter terms or variable rates are more common, it has also created a bigger divide between would-be buyers and existing homeowners, many of whom have loans with rates below 4% and would therefore face much higher costs to move.
Economists said he thought that December would mark the bottom of the market, noting that mortgage rates have dropped back in recent months, falling to 6.6% this week, the lowest level since May.
These newly observed declines come as investors look to bet the central bank will start reversing course and cut rates later this year.
