Fine China?

A good week for

• Developed market equities strengthened in sterling terms, led higher by the UK
• Sterling broadly appreciated against currency pairs

A bad week for

• Bonds continued to decline, led lower by UK gilts
• Oil fell c. -5% in US dollar terms

China

Economic data suggests that China’s economic rebound may be stronger than expected. GDP growth in the first quarter of 2023, the period directly following the easing of social restrictions, was 4.5% year-on-year, ahead of the 4% anticipated by economists. This strength was mostly driven by the recovery of consumption spending and services activity. Retail sales surged to 10.6%, well ahead of the 7.5% annual growth expected. Industrial production, in contrast, was weaker, growing by 3% as opposed to the 3.5% expectation. This solid start to the year has led economists to increase their forecasts for Chinese GDP growth in 2023, with many now expecting growth to be close to, or even above, 6%. More vigorous growth in China is expected to support activity elsewhere, though the recovery will likely be services-led. This may mean that China’s rebound requires less raw commodities than in previous recoveries.

Global growth

Global business surveys painted a mixed picture last week. Across most regions, Purchasing Managers’ Index survey data suggested that the services sector is going from strength to strength, with indicators well above the “50” level that signals expansion, and month-on-month improvements. However, the manufacturing sector broadly signalled deterioration. Though goods demand has been stronger than expected, the tech sector appears to be slowing, with a knock-on impact for the broader manufacturing sector. This is evident in Taiwan’s industrial production data, which weakened by almost 30% in the first quarter of 2023. Despite this weakness in manufacturing, the strength of services activity suggests that economic forecasts may be revised higher.

UK inflation

UK CPI fell by less than expected in March, slowing to 10.1% year-on-year from 10.4% in February. Fuel prices were the main driver of the decline in headline inflation, falling c. 6%. Fuel is expected to remain a powerful downward force in coming months, especially in April, when last year’s significant OFGEM price cap rise will roll out of the year-on-year calculation. Energy prices are also expected to fall in 2023, which could see retail energy prices lower in the second half of the year. In contrast, food prices remained a source of strength for CPI, with poor harvests in Southern Europe and North Africa likely contributing for a second month. Looking forward, commodity futures prices suggest food inflation should slow later this year, along with broader goods inflation. All in all, this is expected to pull CPI down below 4% in the final quarter of 2023. As headline inflation falls, core inflation will likely attract more attention, currently resilient at 6.2%.

UK labour market

Given the strength of UK core inflation, UK labour market data will be of interest to the Bank of England, ahead of May’s Monetary Policy Meeting. Last week’s labour market report painted a picture of continued strength overall, with growing employment and still low joblessness. Payrolls increased in March by 31,000. Survey based measures of employment for February showed that participation increased, pushing up the unemployment rate marginally to 3.8%, still close to a record low. Overall wage growth accelerated to 5.9%, though private sector wage growth slowed modestly to 6.9% from 7%. The slowing in headline inflation is likely to translate to slower headline wage growth, though the continued tightness in the labour market may mean that wages are still growing faster than the Bank of England consider to be compatible with reaching their inflation target. Given that economic data has been somewhat stronger than expected, this increases the probability of further rate hikes in the UK.

UK consumer

Despite strong wage growth, UK consumers have still faced negative real-terms wage growth this year, due to high inflation. This has translated to negative consumer confidence readings in recent months. However, March’s consumer confidence index recovered strongly, with consumers more confident about their own financial position. While this didn’t help retail sales in March, which fell 0.9%, bad weather may have contributed, and spending could be stronger than expected in coming months.

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