UK Economic Momentum Slows Further but Budget Boost is Coming

Economic

Summary:

UK GDP fell again in October, though that probably exaggerates the extent of the recent slowdown in economic momentum. Growth is likely to outpace much of Western Europe next year following the recent budget, though the downside risks are more obvious than the upside.

The UK economy has been on quite the journey this year, at least if the GDP figures are to be believed. Having started the year with an eyewatering – and indeed eyebrow-raising – 0.7% quarterly growth figure for 1Q, momentum has slowed considerably in the second half of the year. October’s monthly GDP saw activity fall for the second consecutive month, albeit only by a marginal 0.1%. Overall fourth-quarter GDP is likely to be flat, we think.

In reality, the story is more nuanced than that. Much of that early 2024 strength was concentrated in sectors that are less tangible and typically not consumer-facing. Service sectors with a clear consumer focus and more intrinsically linked to underlying economic fundamentals actually performed more strongly over the summer when the broader economy appeared to be slowing – albeit we did see a sizable drop in activity in these areas during October.

Our conclusion from this is that the economy has probably slowed down, but neither the initial boost nor the more recent sluggishness is likely to have been as extreme as this year's monthly GDP data indicates.

Consumer-facing services saw activity plunge in October

UK Economic Momentum Slows Further but Budget Boost is Coming_1

All of this of course is history anyway. We still think that the UK economy is poised to outpace most of Western Europe next year, judging by our 2025 annual GDP forecasts. That perhaps says more about the health of other parts of the continent, but it also heavily reflects the recent fiscal stimulus.

Public spending was increased by some £60bn – or more than 2% of GDP – relative to budget plans inherited from the previous Conservative government. Some of that might not materialise and we’re sceptical that the planned, sudden increase in public investment can readily find its way into shovel-ready projects straight away. But the majority of the spending increase is going to government departments in day-to-day funds, much of which will end up in wages. And thus the fiscal multiplier – or the passthrough to wider economic growth – is likely to be pretty high.

Having said all of that, the risks are clearly tilted downwards. The UK is often singled out as being less affected by an impending US trade war, and that is true. But America still buys 20% of UK exports, even if the majority of that is in services which are not impacted by tariffs.

Then there’s the jobs market. The official data is of dubious quality right now. But a range of indicators suggest hiring appetite has cooled materially this year and payroll-based data suggests that employment, outside of government-heavy sectors, has fallen by almost 1% since the end of 2023. We suspect this gradual cooling will continue into 2025, and risks being amplified by recent tax hikes on employers. Around half of Chief Financial Officers who responded to a recent Bank of England survey suggested they’d deal with those tax rises by reducing employee numbers.

However, unless growth materially disappoints, and that’s not our base case, the Bank of England is going to remain laser-focused on inflation. With services inflation stuck around 5%, next week’s meeting is likely to be a bit of a non-event, with policymakers opting to keep rates on hold again until February.

Source:ING

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Warren Takunda

Economic

Britain’s economy shrank by 0.1% in October, underlining the scale of Labour’s challenge to get the economy growing.

Figures from the Office for National Statistics showed the unexpected fall in GDP was driven by declines in construction and production, while the dominant services sector stagnated.

Economists, polled by Reuters, had expected the economy to grow by 0.1%. It follows a decline of 0.1% in September and sluggish growth of 0.1% in the third quarter of the year, according to figures last month.

Keir Starmer said last week it was the government’s “aim” to make the UK the fastest-growing G7 economy, while pledging to deliver higher real household disposable income by 2029.

However, a range of companies have said they plan to slow spending and hiring after Labour’s budget in October, which included £40bn of tax rises.

Economists said the second successive monthly contraction in GDP meant the economy had grown for only one of the five months to October, and might mean the economy shrank for the fourth quarter as a whole.

The chancellor, Rachel Reeves, said the figures were “disappointing” but insisted Labour was putting the economy back on track for growth.

“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” said Reeves. “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.”

Business groups have complained that measures announced in the budget, including an increase in employer national insurance contributions, add to their costs and deter investment.

Production output fell by 0.6% in October because of falls in manufacturing, mining and quarrying, while construction fell by 0.4%.

“The economy contracted slightly in October, with services showing no growth overall and production and construction both falling,” said Liz McKeown, the director of economic statistics at the ONS.

“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics and legal firms.”

Paul Dales, the chief UK economist at Capital Economics, said it was “hard to tell how much of the fall is temporary as activity was put on hold ahead of the budget”.

“The clear risk is that more activity was cancelled or postponed after the budget,” he said, citing weak PMI data. “There is every chance that the economy went backwards in the fourth quarter as a whole.”

Figures last week showed that growth in the UK’s dominant services sector slowed to its lowest rate in more than a year in November as firms digested business tax rises in the budget.

The closely watched S&P Global UK services PMI survey scored 50.8 in November, slowing from 52.0 in October.

The pound fell to its lowest level against the US dollar in nearly two weeks, dropping as much as 0.4% in early trading.

Analysts said the contraction in the UK economy could make it more likely that the Bank of England monetary policy committee will vote to cut the base rate when they meet later this month.

“These latest figures will send a chill through the corridors of Westminster, as the government’s growth agenda looks increasingly at risk,” said Isaac Stell, investment manager at Wealth Club.

“With more and more companies stating they will cut back on hiring and investment to deal with the rising costs related to the budget, the question will be, where will growth actually come from?”

The disappointing growth figures came as a survey by GfK showed that consumer confidence remained suppressed in December amid the “continuing uncharitable view on the UK’s general economic situation”.

The market research company’s latest consumer confidence survey said that consumers “don’t know where they are going” and are still thinking twice about big-ticket purchases.

Anna Leach, the chief economist at the Institute of Director, said: “As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs.

“The recent blows to businesses have made the task of achieving stronger sustainable growth harder.”

Separate ONS trade data showed imports and exports of goods fell in October. Exports to the European Union were higher than exports to the rest of the world for the first time in nearly a year.

“A weakening export climate amid rising global policy uncertainties and declining business confidence, exacerbated by the impact of recently announced budget measures, raises concerns about sustaining the growth momentum,” Hailey Low, associate economist at NIESR, said.

Last month, the Bank trimmed its annual growth forecast for 2024 to 1% from 1.25% but predicted a stronger 2025 with 1.5% growth, reflecting a short-term boost to the economy from the budget.

Source: TheGuardian

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Warren Takunda

Stocks

December Nasdaq 100 E-Mini futures are trending up +0.65% this morning as positive earnings from chipmaker Broadcom boosted sentiment, with investors looking ahead to next week’s Federal Reserve meeting.

Broadcom surged over +14% in pre-market trading after the semiconductor firm reported a 220% increase in AI revenue for the year and issued above-consensus FQ1 revenue guidance.

In yesterday’s trading session, Wall Street’s three main equity benchmarks closed lower. Adobe plunged over -13% and was the top percentage loser on the S&P 500 and Nasdaq 100 after the Photoshop maker provided a disappointing 2025 revenue forecast. Also, chip stocks lost ground after the benchmark 10-year Treasury yield rose to a 2-1/2 week high, with Micron Technology and Lam Research sliding more than -3%. In addition, Nordson slumped over -8% after the dispensing equipment maker issued soft full-year guidance. On the bullish side, Warner Bros Discovery surged more than +15% and was the top percentage gainer on the S&P 500 and Nasdaq 100 after the media giant announced it would split into two operating divisions.

Economic data released on Thursday showed that the U.S. producer price index for final demand came in at +0.4% m/m and +3.0% y/y in November, stronger than expectations of +0.2% m/m and +2.6% y/y. Also, the core PPI, which excludes volatile food and energy costs, rose +0.2% m/m and +3.4% y/y in November, compared to expectations of +0.2% m/m and +3.2% y/y. In addition, the number of Americans filing for initial jobless claims in the past week unexpectedly jumped by +17K to an 8-week high of 242K, compared with the 221K expected.

“With high egg prices appearing to play a key role in the hotter-than-expected headline PPI, traders may be focusing more on the jump in jobless claims. The Fed is primed to be sensitive to any signs of a softening jobs picture,” said Chris Larkin at E*Trade from Morgan Stanley.

Meanwhile, U.S. rate futures have priced in a 96.7% probability of a 25 basis point rate cut at the upcoming monetary policy meeting.

Today, investors will focus on U.S. Export and Import Price Indexes for November, set to be released in a couple of hours. Economists forecast the export price index to be -0.2% m/m and the import price index to be -0.2% m/m, compared to the previous figures of +0.8% m/m and +0.3% m/m, respectively.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note is at 4.339%, up +0.30%.

The Euro Stoxx 50 futures are up +0.20% this morning as investors continued to evaluate Europe’s economic and monetary policy outlook. The Office for National Statistics reported Friday that Britain’s economy unexpectedly contracted for the second consecutive month in October. Separately, the Federal Statistical Office said that Germany’s exports fell more than expected in October.

In addition, data from Eurostat showed that the Eurozone’s monthly industrial production stagnated in October. Meanwhile, the European Central Bank, as expected, cut the deposit facility rate by a quarter-point to 3.00% on Thursday and dropped previous wording that monetary policy will remain “sufficiently restrictive for as long as necessary.”

Bloomberg reported on Thursday that ECB policymakers anticipate a further quarter-point interest rate cut in January and likely in March as inflation stabilizes at the 2% target and economic growth continues to be sluggish.

ECB Governing Council member Francois Villeroy de Galhau stated on Friday that the central bank plans to reduce borrowing costs further in 2025, adding that investors’ expectations of more than 100 basis points of easing appear reasonable.

Also, ECB policymaker Jose Luis Escriva said, “If things go well if we continue to converge to the 2% inflation target, it is logical that we will lower interest rates again at future meetings.” In corporate news, Muenchener Rueckversicherungs-Gesellschaft Ag IN gained over +5% after setting a 6 billion euro net profit target for next year.

U.K.’s GDP, Germany’s Exports, Germany’s Imports, France’s CPI, Spain’s CPI, and Eurozone’s Industrial Production data were released today.

U.K. October GDP has been reported at -0.1% m/m and +1.3% y/y, weaker than expectations of +0.1% m/m and +1.6% y/y.

The German October Exports came in at -2.8% m/m, weaker than expectations of -2.0% m/m.

The German October Imports stood at -0.1% m/m, stronger than expectations of -0.6% m/m.

The French November CPI arrived at -0.1% m/m and +1.3% y/y, compared to expectations of +0.1% m/m and +1.3% y/y.

The Spanish November CPI stood at +0.2% m/m and +2.4% y/y, in line with expectations.

Eurozone October Industrial Production arrived at 0.0% m/m and -1.2% y/y, compared to expectations of 0.0% m/m and -1.9% y/y.

Asian stock markets today settled in the red. China’s Shanghai Composite Index (SHCOMP) closed down -2.01% and Japan’s Nikkei 225 Stock Index (NIK) closed down -0.95%.

China’s Shanghai Composite Index closed sharply lower today as investors were disappointed by the lack of details from a Chinese economic conference. Property stocks were among the worst performers on Friday.

The benchmark index wiped out all the earlier gains and notched a moderate weekly loss. A readout from the annual Central Economic Work Conference, published by the Xinhua News Agency, lacked policy details on fiscal stimulus. Top officials, led by President Xi Jinping, signaled increased public borrowing and spending in 2025, shifting the policy focus to consumption.

However, few new policy efforts to stabilize the housing market were mentioned. Investors must now wait until the annual legislative sessions in March for further clarity. Meanwhile, Reuters reported on Thursday that a trade adviser to U.S. President-elect Donald Trump stated that the U.S. would look unfavorably on China’s efforts to weaken its renminbi currency to mitigate the impact of potential trade tariffs. In corporate news, Gotion fell over -2% after disclosing its investments in two 20-gigawatt-hour lithium battery production projects in Morocco and Slovakia.

Japan’s Nikkei 225 Stock Index closed lower today as overnight losses on Wall Street dampened sentiment, prompting investors to sell shares for profit-taking. Electronics and machinery stocks led the declines on Friday.

Despite Friday’s drop, the benchmark index ended the week with gains. The Bank of Japan’s Tankan quarterly survey released on Friday showed a slight improvement in sentiment among large Japanese manufacturers in the final quarter of the year, aligning closely with the BOJ’s view ahead of a policy meeting next week.

Separately, final data from the Ministry of Economy, Trade, and Industry showed that industrial production in Japan rose less than initially estimated in October. Meanwhile, Reuters reported on Friday that the BOJ is inclined to maintain interest rates steady next week as policymakers opt to further assess overseas risks and clues on next year’s wage outlook.

In corporate news, Oji Holdings climbed over +11% after the packaging maker unveiled a significant share buyback program. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed down -1.55% to 21.63.

The Japanese Tankan Large Manufacturers Index has been reported at 14 in the fourth quarter, stronger than expectations of 13.

The Japanese Tankan Large Non-Manufacturers Index stood at 33 in the fourth quarter, in line with expectations.

The Japanese October Industrial Production arrived at +2.8% m/m, weaker than expectations of +3.0% m/m.

Pre-Market U.S. Stock Movers

Broadcom surged over +14% in pre-market trading after the semiconductor firm reported a 220% increase in AI revenue for the year and issued above-consensus FQ1 revenue guidance.

RH soared more than +17% in pre-market trading after raising its full-year revenue growth forecast.

Source: Barchart

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Devin

Central Bank

The PBOC will “step up expectation management on exchange rates and vigorously respond to external shocks,” the head of the monetary policy department Zou Lan told state media in an interview. In addition, the central bank will “resolutely prevent risks of overshooting in the exchange rate.”

The PBOC’s new “moderately loose” monetary policy has increased its ability to respond to growth challenges, Zou said, days after the bank unveiled the new stance and a day after the government said the monetary authority would look to loosen policy in the near future to support the economy.

No details were announced on the possible timing of further monetary easing, but the statement also repeated the usual pledge to keep the yuan “basically stable,” likely signaling the central bank will make an effort to slow depreciation of the Chinese currency as it loosens monetary policy.

Pressure on the yuan has intensified since the re-election of Donald Trump, who has threatened to impose tariffs on China and other countries. Some investors have speculated Beijing will abandon its current policy of maintaining a stable currency to compensate for any impact this could have on its economy.

The yuan has fallen sharply since mid-October and slid Thursday after a media report that the authorities were considering letting it depreciate in response to the threat of a trade war with the US. The onshore yuan lost 0.1% to 7.2795 against the dollar on Friday, with its offshore peer down 0.2%.

Source:Bloomberg News

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Warren Takunda

Economic

The pound fell on Friday after data showed the British economy shrank unexpectedly in October, which could prompt traders to attach a greater chance to the prospect of speedier rate cuts by the Bank of England next year.

Official data showed UK economic activity contracted 0.1% in October. A Reuters poll of economists had forecast a rise of 0.1% last month, from September's 0.1% fall.

This was the first back-to-back decline since the onset of the COVID-19 pandemic in 2020, when Britain imposed the first lockdown.

Sterling initially fell as much as 0.43% after the numbers and was last down 0.3% at $1.2635.

"The market will be surprised, this is not part of the game plan. However, the outlook for 2025 does look more encouraging," Neil Jones, managing director, FX sales and trading for financial institutions, TJM Europe, said.

"I would expect further limits to any pound sell-off and gilt rally. Wages and inflation will likely remain solid and dissuade the BOE from shifting lower, relative to the Fed and ECB expectations," he said.

The pound was last down 0.4% against the euro at 82.895. Sterling is set for a second monthly gain against the euro, which has fallen 0.6% in December so far to trade around its weakest in over eight years.

In part, it is the expected difference in interest rates in Britain and the euro zone, as the BoE is likely to move more slowly on cuts than the European Central Bank.

The ECB cut rates as expected by a quarter point on Thursday, but sounded a cautious note on the outlook for inflation, which might mean it does not have the scope to deliver the almost five cuts markets have priced in for 2025.

The Dow and S&P 500 each lost more than half a percent, and the Nasdaq shed more than six tenths of a percent to dip back below 20,000, a milestone it crossed a day earlier.

The BoE, meanwhile, may find it needs to act more swiftly to head off a more protracted slowdown in the British economy.

Recent data on business activity showed a deterioration in the manufacturing sector. Grocery inflation is creeping up, squeezing the budgets of British households, while the labour market is sputtering.

Data earlier this week showed job vacancies have dried up faster in the UK than in other similar countries over the past year.

A separate report on employment on Dec. 9 showed demand for UK workers crashed in November, after the Labour government's first budget, in a sign of the impact of the tax increases for employers that it contains.

Source: Reuters

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Commodity

Economic

A spectacular year for the precious metal

It’s been a phenomenal year for gold, with prices rising by almost 30% and hitting numerous new all-time highs. Geopolitical uncertainties and the US presidential elections drove prices to a peak of $2,790 per ounce on October 30. On the other hand, gold prices experienced a dip when Donald Trump was re-elected, as uncertainty about a contested election decreased, and investors redirected their focus to the rising performance of the US dollar.

Year Ahead – Gold’s Golden Year: Will It Shine Even Brighter in 2025?_1

Impact of Trump’s re-election

Donald Trump’s re-election and the subsequent reduction in market uncertainty led to a retreat in gold prices as investors shifted toward the strengthening US dollar. The precious metal may face a significant negative movement between $2,200-$2,600 through the end of the first quarter of 2025. Following Trump’s recent victory, gold prices have seen a decline due to rising bond yields and a stronger US dollar, which make gold less appealing for investors. However, gold often serves as a safe-haven asset during times of uncertainty. If Trump’s policies lead to increased geopolitical risks or economic instability, demand for gold could rise again as investors seek to protect their wealth.

Gold prices pulled back by more than 3% in November, representing their most significant monthly decline since September 2023. Apprehension that elevated tariffs under a forthcoming Donald Trump administration may result in sustained higher interest rates is the market’s biggest fear.

Federal Reserve’s influence

The Federal Reserve’s monetary policy will continue to have a significant impact on gold prices in 2025. If inflation in the US declines and the Fed cuts interest rates further as expected, this will reduce the opportunity cost of holding non-yielding assets, making them more attractive to investors. Additionally, lower interest rates can lead to a weaker US dollar, further boosting demand for gold as it becomes cheaper.

Year Ahead – Gold’s Golden Year: Will It Shine Even Brighter in 2025?_2

But persistent inflation and the Fed’s response to it can also drive gold prices higher. If the Fed’s policy stance is seen as insufficient to curb inflation, investors may turn to the precious metal as a hedge against rising prices.

Most economists are concerned that President-elect Trump’s proposed policies will lead to increased inflation, threatening to derail the Fed’s rate-cutting cycle.Investors have already drastically scaled back their rate cut bets, slashing the odds in half, to about 75 basis points by the end of 2025, on the expectation of a spike in inflation from his proposed policies, which include increased tariffs and tax cuts.

Year Ahead – Gold’s Golden Year: Will It Shine Even Brighter in 2025?_3

Source:XM

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Justin

Economic

Forex

(Dec 13): Germany’s economy will hardly grow in 2025 after shrinking again this year, according to fresh forecasts from Bundesbank.

Gross domestic product (GDP) will fall by 0.2% in 2024, it said on Friday — slashing a June prediction for 0.3% growth. Output will expand by just 0.2% in 2025, rather than the 1.1% seen earlier, and could even fall if US trade tariffs materialise.

“The German economy is not only struggling with persistent economic headwinds, but also with structural problems,” Bundesbank president Joachim Nagel said, highlighting the industrial sector in particular. “The labour market, too, is now responding noticeably to the protracted weakness of economic activity.”

The forecasts worsen an already gloomy outlook for Europe’s biggest economy as long-standing struggles among its industrial and car giants are compounded by political turmoil before snap elections in February and the dangers posed by Donald Trump’s return.

The Bundesbank expects the economy to stagnate this winter and only begin to slowly recover during next year. For 2026 and 2027, it forecasts growth of 0.8% and 0.9%.

Risks are to the downside, however, specifically from Trump’s policies. Germany’s “strong reliance on exports makes it particularly vulnerable to the decline in foreign demand resulting from the global trade losses triggered by the restrictive trade policy,” the Bundesbank said.

Overall, economic output in 2027 could be 1.3-1.4% below the baseline scenario due to a US policy shift, the report said. According to different models, a trade conflict could even cause German GDP to stagnate or shrink again in 2025.

Nagel has warned in the past that Trump’s levies could cause another GDP contraction in 2025.

On inflation, the Bundesbank revised down its outlook from June. It expects consumer-price growth to remain elevated in 2025, cooling only slightly to 2.4% from 2.5%. In the coming years, however, it sees inflation gradually returning to 2%.

“There are two main factors at work here: The previous tightening of monetary policy and decreasing price pressure from labor costs,” Nagel said.

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Source: Theedgemarkets

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UK Economic Momentum Slows Further but Budget Boost is Coming

Consumer-facing services saw activity plunge in October

Source:ING

UK’s Economy Shrinks Unexpectedly by 0.1% in October

Source: TheGuardian

Nasdaq Futures Climb as Broadcom Provides a Boost

Source: Barchart

Year Ahead – Gold’s Golden Year: Will It Shine Even Brighter in 2025?

Source:Bloomberg News

Sterling Falls After Shock Contraction in UK GDP

Source: Reuters

Year Ahead – Gold’s Golden Year: Will It Shine Even Brighter in 2025?

A spectacular year for the precious metal

Impact of Trump’s re-election

Federal Reserve’s influence

Source:XM

German Economy Will Hardly Grow In 2025, Says Bundesbank

Source: Theedgemarkets

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