As the United Kingdom currently navigates a complex economic landscape characterized by striking workers, low productivity, and a challenging housing market, attention has turned to the potential impact on growth and inflation. Data from the Office for National Statistics indicates that productivity in the UK remains low. At the same time, the Halifax house price index has reported a 1.5% decline in prices for December, the fourth consecutive month of decline. As the market awaits the release of the UK GDP rate, set to be announced on Friday, the expectation is for a contraction of 0.3%. This raises the question of whether the Bank of England can continue to prioritize inflation while also addressing the potential onset of a recession in the UK.
In Europe, the situation is somewhat different, with retail sales in December rising by 0.8%, surpassing the expected 0.5%. However, the EUR/USD fell 2.5% last week in response to a resolute Federal Reserve. Despite a lower-than-expected headline Eurozone inflation rate of 9.2%, core CPI was reported higher than expected at 5.2%. This raises the question of whether the European Central Bank will need to continue on its path of interest rate hikes.
Across the Atlantic, the US economy is also navigating a complex environment, with the USD index declining 12% in Q4 2022. This was in response to the Federal Reserve’s decision to only hike 0.5% in December instead of the 0.75% hike at previous meetings. However, recent data releases, including 235k new jobs added to the economy and a falling unemployment rate of 3.5%, suggest that the labour market is tightening. The Federal Reserve has stated that they are concerned about the wage-price spiral and is trying to keep the labour market tight. The latest job openings data showed 10.458 million job vacancies, with 5.5 million people unemployed and looking for work, there is a 2:1 ratio of jobs to workers.
With the ISM Services PMI surprising the market with a fall to 49.6, well below the expected 55.0 mark, it remains to be seen whether USD will bounce in Q1 2023 and, if so, whether solid jobs data and stubborn CPI will aid this.