UK economy shrinks for second consecutive month

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UK economy shrinks for second consecutive month

The UK economy contracted for the second consecutive month in October, as concerns surrounding the Budget continued to dampen confidence.

According to official data, the economy shrank by 0.1%, defying earlier predictions of a return to growth following September’s decline.

The Office for National Statistics (ONS) reported that activity stagnated or decreased across several sectors, with pubs, restaurants, and retail experiencing notably sluggish months. 

However, industries such as real estate, legal services, and accountancy saw a surge in activity as work was expedited ahead of the Budget announcement by Reeves, the ONS added.

Meanwhile, a December survey on consumer confidence showed a slight improvement in people’s outlook on their personal finances for the coming year. However, research by market insights firm GfK indicated that "views on the economy remain unchanged from November," suggesting ongoing uncertainty about the future.

The ONS figures reveal that the economy has only grown once in the past five months. Capital Economics noted that GDP is now 0.1% below the level seen before Labour's election victory in July.

Despite two interest rate cuts by the Bank of England this year, rates remain relatively high at 4.75%, a stark contrast to recent years. 

The Bank is set to hold its final interest rate meeting of 2024 next week but is not expected to lower rates again until next year.

Economists cautioned against drawing definitive conclusions from October’s preliminary growth estimate, which may be revised. Over the three months leading to October, the economy saw modest growth of 0.1%.

In October, manufacturing experienced the steepest decline, falling 0.6%, followed by a 0.4% drop in construction. The services sector, which constitutes the majority of the UK economy, recorded no growth at all.

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US job market bounces back following impact of hurricanes and strikes

Hiring in the US surged in November, continuing a prolonged streak of job gains that have bolstered the world’s largest economy.

According to the Labor Department, employers added 227,000 jobs, with the healthcare sector, restaurants, and bars leading the growth.

This marks a sharp rebound from October, when job growth slowed significantly due to major storms and labour strikes. The report comes as analysts debate the Federal Reserve's next steps on interest rates, with expectations of further cuts in the coming months.

The Fed began lowering rates in September, citing the need to support economic growth and prevent potential softening in the labour market. However, job creation stalled in October, impacted by strikes at Boeing and other companies, as well as hurricane-related disruptions that sidelined millions of workers.

The November recovery suggests that October’s slowdown was likely temporary. The Labor Department also revised its estimates for September and October upward, showing stronger job gains than initially reported.

Despite the positive hiring numbers, the unemployment rate inched up from 4.1% to 4.2%, the highest since August. Many analysts believe this increase supports the case for an additional rate cut, which could be announced during the Federal Reserve’s upcoming meeting.

However, Federal Reserve Chair Jerome Powell recently downplayed the urgency of aggressive rate reductions, signalling a measured approach.

Over the past year, average hourly wages have risen by 4%, a trend that some analysts warn could fuel a resurgence in inflation. Rising wages may increase purchasing power but also risk pushing up prices, adding another layer of complexity to the Fed's balancing act between supporting economic growth and keeping inflation in check.

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Uncertainty looms as Bank of Japan looks to make rate change decision

Investors are grappling with mixed signals and a web of conflicting indicators, leaving them with little clarity ahead of the Bank of Japan’s (BOJ) next policy meeting, which concludes on Thursday.

Market bets are nearly evenly split on whether the central bank will maintain its benchmark rate at 0.25% or opt for an increase. A recent Bloomberg survey of economists found that 52% expect the BOJ to wait until January to take action, while 44% predict a hike this week.

Reports in the Japanese press suggest that BOJ policy board members may favour holding off on a rate change for another month, aiming to assess how markets respond to the early days of U.S. President Donald Trump’s administration. However, broader analyses remain inconclusive, reflecting the uncertainty.

The BOJ has repeatedly emphasized that rate hikes will only occur if inflation and economic growth align with its forecasts. Yet, political pressures complicate this stance, with calls to act when the yen weakens or to pause when pro-growth lawmakers dominate policy discussions.

Both the government and the BOJ have underlined that an excessively weak yen—or one that depreciates too rapidly—is undesirable. The yen strengthened to around ¥140 per dollar in September, only to slide back into the ¥150 range. Currently trading at approximately ¥153.6, the currency’s level is again raising concerns about potential weakness.

The broader landscape of monetary policy adds to the complexity. The U.S. Federal Reserve is widely expected to cut rates again this week, despite robust U.S. economic performance and inflation hovering near 3%. The CME FedWatch tool places the probability of a rate cut at the Fed’s Wednesday meeting at 93%.

Some analysts argue that delaying a decision until January may not provide much greater clarity. The uncertainty surrounding the Trump administration’s policies could introduce additional complications, leading some to suggest that the BOJ has little reason to wait.