Our latest article provides an economic review of August 2024. It explores key areas such as nominal pay is now rising at its slowest pace, the Bank of England starts to cut rates, the growth of the UK’s economy, and the latest in the global markets.

Bank of England starts to cut rates

The Bank of England (BoE) approved the first interest rate cut since March 2020 at the beginning of August, and it is expected that a second cut will be announced before the year is out.

The Bank’s Monetary Policy Committee (MPC) announced the decision on the 1^st August following the latest meeting. At the meeting, the nine-member panel voted by a slim 5-4 majority to reduce rates by 0.25 percentage points, taking the Bank Rate down to 5%. The four dissenting voices each voted to leave rates unchanged.

BoE Governor Andrew Bailey made a statement following the announcement of the cut, calling it “an important moment in time” but emphasising that people shouldn’t anticipate a significant decline in interest rates in the upcoming months. Although Mr. Bailey acknowledged that lower inflation had paved the way for reduction, he also said that policymakers must ensure that inflation stays low and not cuts rates by too much or too quickly.

In fact, the Office for National Statistics (ONS) released the most recent set of consumer pricing statistics two weeks following the MPC announcement, showing an increase in inflation for the first time this year. After two months at the BoE’s 2% target rate, the annual headline rate increased to 2.2% in July. This was less than the 2.3% consensus forecast predicted by economists surveyed by Reuters.

Despite the BoE’s insistence that further rate cuts will not be rushed, the likelihood of another decrease before the year’s end does seem to have increased in light of July’s lower than expected inflation figure. In a recent Reuters survey, the majority of economists stated that they expected rates to remain on hold this month, but they also projected that the BoE will approve one more cut this year, with November being the most likely month to see that happen.

UK economy grows strongly

According to second quarter GDP figures released last month by ONS showed the UK economy has continued its strong recovery from last year’s brief recession, while more recent survey data points to relatively solid third quarter growth too.

According to the most recent GDP statistics, the UK’s economic output expanded by 0.6% between April and June. This was expected by economists and only reflects a slight decline from the strong growth seen in the first three months of the year. Strong growth in the service sector, according to ONS, was the primary driver of the second-quarter expansion, which offset small quarterly contractions in both the construction and manufacturing sectors.

Economists have cautioned that the present rate of growth is unlikely to continue into the second half of 2024, but the GDP figures so far this year (which are stronger than expected) have prompted economic soothsayers to upwardly revise their full-year forecasts. For example, the BoE revised its forecasts, predicting that the UK economy will grow by 1.25% across 2024 as opposed to the earlier estimate of 0.5%.

However, recently disclosed survey data indicates a slowdown in the third quarter, even though the data still indicates the economy is growing at a respectable rate. The S&P Global/CIPS UK Purchasing Managers’ Index (PMI) flash headline growth indicator, for example, increased from 52.8 in July to 53.4 in August, both numbers well above the 50 threshold indicating growth in private sector output.

Chief Business Economist Chris Williamson of S&P Global Market Intelligence commented on the study, pointing out that both the manufacturing and service sectors saw strong growth in August. He added, “Although GDP growth looks set to weaken in the third quarter compared to the impressive gains seen in the first half of the year, the PMI is indicative of the economy expanding at a reasonably solid quarterly rate of around 0.3%.”

Markets

With August coming to an end, investors began to focus on the possibility of a US interest rate cut in response to comments made by Federal Reserve Chairman Jerome Powell in his keynote speech at the annual Jackson Hole economic symposium.

Powell stated, “The time has come for policy to adjust… The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” Investors anticipate September 17–18, which is the Fed’s next meeting.

The UK’s FTSE 100 ended flat on 30^th August, although it saw its second straight month of gains. As anticipation for an interest rate reduction persisted, real estate shares were strong at month’s close. The FTSE 250 finished the month 2.38% lower at 21,086.54, while the index finished the month at 8,376.63, a minor monthly increase of 0.10%. At closing, the FTSE AIM was down 1.84% for the month at 772.51. With a 1.75% gain, the Euro Stoxx 50 ended August at 4,957.98. The Nikkei 225 in Japan ended the month at 38,647.75, a decrease of 1.16% from the previous month.

The Dow Jones saw strong gains in the US, concluding the month at a high of 41,563.08, up 1.76%. In the meantime, the NASDAQ concluded August at 17,713.62, up 0.65%.

The euro ended the month at €1.18 versus the pound on the foreign currency markets. The US dollar closed at $1.10 vs the euro and $1.31 versus the sterling.

With a monthly increase of 3.59%, gold ended August trading at $2,513.35 per troy ounce. The dollar has strengthened against gold following recent all-time highs for the safe haven commodity. After a loss of 5.04% over the month, Brent crude ended the month at $76.83 per barrel. August raised concerns about demand and the  prospect of increased supply from OPEC+ weighed on prices.

Index                                                  Value (30/08/24)                              Movement since 31/07/24

FTSE 100                                             8,376.63                                              +0.10%

FTSE 250                                             21,086.54                                             -2.38%

FTSE AIM                                            772.51                                                   -1.84%

Euro Stoxx 50                                     4,957.98                                               +1.75%

NASDAQ Composite                          17,713.62                                            +0.65%

Dow Jones                                          41,563.08                                             +1.76%

Nikkei 225                                          38,647.75                                               -1.16%

(Data compiled by The Outsourced Marketing Department)

Nominal wage growth continues to slow

Nominal pay is currently increasing at its weakest rate in nearly two years, according to official earnings statistics released last month. Survey data also suggests that this slowdown is likely to continue.

According to the most recent ONS data, in the three months leading up to the end of June, average weekly earnings—excluding bonuses—increased at an annual rate of 5.4%. This was the lowest recorded figure since August 2022 and decreased from 5.8% over the preceding three months. However, when accounting for CPI inflation, regular pay is still increasing at a 3.2% annual rate, which is the joint-highest real earnings growth in about three years.

According to figures from a survey conducted by the Recruitment and Employment Confederation and published early last month, nominal pay growth accelerated even more slowly in July than it had in June. The poll also revealed that the rate of pay increases for temporary employees is at its weakest point in more than three years.

Additionally, data from the Chartered Institute of Personnel and Development indicates that over the next year, pay growth is probably going to slow down even more. Employers anticipate pay rises to increase by an average of 3% over the next 12 months, which would be the lowest pay increases in the previous two years, according to the study.

Euros and discounting boosts retail sales

While survey data from last month indicates that the retail climate is still tough, the most recent official figures show that sales volumes increased in July, and there is still hope that rising real incomes would lead to an increase in spending.

After declining by 0.9% in June, overall retail sales volumes increased by 0.5% in July, according to data released by the ONS recently. According to ONS, July saw a significant increase in sales at department stores and sporting goods stores. Retailers attributed the growth to summer sales discounts and major sporting events like Euro 2024.

The most recent GfK consumer confidence index continues to show comparatively high levels of consumer mood, which is encouraging for the retail industry. In fact, August’s headline figure remained stable at a nearly three-year high, as households expressed more enthusiasm for large purchases and adopted a more optimistic outlook for their own finances.

However, recently released survey data does highlight the relatively tough trade conditions that retailers still face. According to the CBI Distributive Trades Survey, August sales were “poor” for the time of year, and September sales volumes are predicted to be disappointing as well. Retailers could “gradually begin to see some tailwinds from consumers’ rising real incomes,” according to the CBI.

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