Closing summary
UK house prices will fall by up to 4% next year as high interest rates continue to affect mortgage affordability and sales completions, according to Halifax.
Britain’s biggest mortgage lender said the price of an average UK property would fall by between 2% and 4% but it expected a part-recovery in the market as interest and mortgage rates eased next year.
“Overall, with the combination of cost of living pressures and interest rate levels that are still much higher than even two years ago, we will likely see continued mild downward pressure on house prices,” said Kim Kinnaird, the director of Halifax Mortgages.
A separate forecast by Nationwide was slightly more upbeat about prospects for 2024. The UK’s biggest building society said it expected UK house prices to similarly suffer a “low single digit decline” but added that they could remain “broadly flat”.
Business output growth edged up to a six-month high in December, led by a faster recovery in the service economy while factories continued to cut back production, according to the latest flash estimate from the S&P Global / CIPS purchasing managers’ index (PMI) survey. This means the UK probably avoided recession, at least for now, economists said, despite a 0.3% contraction in GDP in October, according to official figures.
The eurozone is headed for recession, as the downturn in business activity deepened, according to a sister survey.
Thames Water’s parent company has been hit by a second downgrade to its credit rating in six months, with Moody’s warning of “materially” increased risks that regulators will block the flow of dividends.
An independent review has found no evidence that NatWest Group’s private bank Coutts has been closing customer accounts due to their political views, but found it may have breached rules by failing to give due notice or explain why they were being shut.
The energy watchdog has set out plans that would result in households paying an extra £16 on top of their energy bills to help suppliers recover almost £3bn in bad debts from customers struggling to pay bills.
Almost 200 homes in London have been sold for £10m in the past year as the super-rich’s pandemic-inspired desire for a place in the country wanes compared to their wish for swish bolt-holes in the capital.
Pearson’s biggest shareholder has said it should be relisted in the US, arguing that leaving London would be better for shareholders as most of the education publisher’s business and rivals are based in North America.
Thank you for reading folks. We’ll be back next week. – JK
Chris Williamson, chief business economist at S&P Global Market Intelligence said:
The early PMI data indicate that the US economy picked up a little momentum in December, closing off the year with the fastest growth recorded since July.
Looser financial conditions have helped boost demand, business activity and employment in the service sector, and have also helped lift future output expectations higher. However, the increased cost of living and cautious approach to spending by households and businesses means the overall rate of service sector growth remains far short of that witnessed during the travel and leisure revival back in the spring and summer.
Manufacturing meanwhile remains a drag on the economy, with an increased rate of order book decline prompting factories to reduce production, cut back on headcounts and scale back their input buying. “Despite the December upturn, the survey therefore signals only weak GDP growth in the fourth quarter.
Business activity growth ticks higher in December
Business activity growth ticked up in December, rising at the fastest pace for five months.
This was supported by the sharpest increase in new orders since July. However, rates of expansion remained historically subdued. Growth was driven by the service sector, while manufacturers suffered a further downturn in new orders and a renewed drop in production.
Meanwhile, cost pressures gained momentum as input prices rose at the fastest pace since September. Although firms continued to pass higher costs on to customers, and at a strong rate, the overall pace of prices charged inflation softened from November.
Flash US PMI Composite Output Index at 51.0 (November: 50.7). 5-month high
Flash US Services Business Activity Index at 51.3 (November: 50.8). 5-month high
Flash US Manufacturing Output Index(4) at 49.0 (November: 50.5). 4-month low
Flash US Manufacturing PMI (3) at 48.2 (November: 49.4). 4-month low
Small upticks in prices in the US PMI pic.twitter.com/ABd8nqrSyE
— ForexLive (@ForexLive) December 15, 2023
Also in the US, manufacturing output rebounded 0.3% in November but Paul Ashworth, chief North America economist at Capital Economics, said this was, in reality, a disappointment, because it included a 7.1% rebound in motor vehicle output, after the UAW union ended its strike at the big three automakers. Excluding motor vehicles, output fell by 0.2% month on month.
That 7.1% monthly rebound last month didn’t quite fully reverse the 9.9% decline in October, so there is a bit more upside to come in December.
The manufacturing sector has been in a slump for some time now, with output down by 0.8% over the past 12 months. Moreover, that decline would have been even bigger if not for the 2.4% increase in motor vehicle output, as the impact of earlier supply shortages eased. That weakness in the factory sector obviously hasn’t held back the economy much, however, with real GDP growth of 3% over the same 12-month period.
That’s because the manufacturing weakness partly reflects a post-pandemic shift back to services spending and away from goods. Moreover, there are some bright spots in manufacturing, particularly the hi-tech sectors, where output increased by 1.7% month on month in November and is up by 14.4% year on year.
Aside from manufacturing, utilities output fell by 0.4% month on month and mining output increased by 0.3%. It’s remarkable that crude oil output is surging without any meaningful rise in drilling activity. Overall industrial production increased by 0.2% month on month.
Fed official says talk of imminent rate cut 'premature’
A top US Federal Reserve official has sought to dampen expectations of imminent interest rate cuts as “premature”.
John Williams, president of the Fed’s New York branch and a member of the rate-setting federal open market committee, spoke a couple of days after the bank signalled strongly that the debate was shifting towards cutting rates, sparking a rally in US stocks and bonds that also boosted other markets.
Williams said in an interview with CNBC:
We aren’t really talking about rate cuts right now.
We’re very focused on the question in front of us, which as chair [Jerome] Powell said... is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.
The Dow Jones Industrial average jumped to a record high and the 10-year Treasury bond yield fell below 4.3% after the Fed on Wednesday forecast three rate cuts next year, which traders interpreted as a sign that the central bank is changing its tough stance and will start cutting rates sooner than expected next year.
BOE's Ramsden tells banks to keep testing failure procedures
More comments from Bank of England deputy governor Dave Ramsden, who is in charge of markets and banking. He told an event hosted by the accountancy firm Deloitte that Britain’s banks should keep testing their failure procedures and never assume they are ‘too big to fail’, following the collapse of Credit Suisse and Silicon Valley Bank.
After taxpayers had to bail out lenders during the 2007-9 global financial crisis, regulators introduced rules to “resolve” a failing lender without causing market mayhem.
However, during the Swiss authorities’ rescue takeover of Credit Suisse by bigger bank UBS public funds were used, raising doubts about the global resolution framework.
The banking crisis in March also prompted the Bank of England and Treasury to engineer a takeover of Silicon Valley Bank’s UK subsidiary by HSBC.
Ramsden said:
We have done a lot to overcome the problem of ‘too big to fail,’ but it’s really important to stress that this isn’t a done-and-done thing. You need to keep testing that conclusion.
That banking crisis showed the need to improve regulators’ “toolkit” for smaller bank failures, and to enhance the readiness to “bail in” banks using their own resources.
The Bank will publish an update next summer on how it would close down a big UK bank without disruption to customers.
Scottish ministers face £1.5bn black hole
In Scotland, ministers are facing a £1.5bn black hole before next week’s draft budget, as a combination of surging inflation and expensive public sector pay deals put extreme pressure on government spending.
The independent Fraser of Allander Institute describes the situation facing the finance minister, Shona Robison, as “one of the most challenging fiscal backdrops in the history of Scottish devolution” in its annual budget report.
But the institute, part of the University of Strathclyde, warns that plans to create a new higher band of income tax are “nowhere near enough” to balance the books.
With severe cuts anticipated across the public sector to protect frontline areas such as health and social security, Robison, who is also deputy first minister, has already warned there is “no doubt” that staffing for public services will have to be reduced.
Here’s our full story on the NatWest review:
An independent review has found no evidence that NatWest Group’s private bank Coutts has been closing customer accounts due to their political views, but found it may have breached rules by failing to give due notice or explain why they were being shut.
A report compiled by external lawyers, hired by NatWest after a dispute with the former Ukip leader Nigel Farage, said their team “found no evidence of discrimination in any of the exit cases, including no evidence of a customer’s account being escalated for exit, or ultimately being exited, due to their political views or party-political affiliations, or any other protected characteristic”.
However, it said Coutts may have breached City regulations by failing to give 60 days’ notice before closing accounts, and by failing to tell clients why they were being ousted.
The law firm Travers Smith also urged the lender to create more formal rules and procedures for cases where accounts are closed for reasons other than financial crime. That includes commercial decisions, where maintaining an account is actually loss-making for the lender.
The report is the last expected from the Travers Smith review. The review was launched in July after Farage started a campaign against Coutts – which caters to the very wealthy – for threatening to close his accounts without explanation. The scandal snowballed after Farage obtained internal documents showing that Coutts was concerned about his alleged “xenophobic, chauvinistic and racist views”.
The report released on Friday said lawyers did identify two cases where NatWest closed the accounts of customers who it believed were unaligned with its “purpose” – which includes promoting diversity and addressing the climate crisis. However, Travers Smith said there were other factors at play in those cases, including the fact that they were too costly to manage, or posed a reputational risk for the bank, and both were ultimately escalated to the bank’s reputational risk committee.
Thames Water owner hit by second credit rating downgrade in six months
Thames Water’s parent company has been hit by a second downgrade to its credit rating in six months, with Moody’s warning of “materially” increased risks that regulators will block the flow of dividends.
The watchdog Ofwat is considering whether to investigate Thames for a potential breach of its licence when it paid a £37.5m dividend in October, as revealed by the Guardian last week. The cash was paid from the core operating company that serves 16 million customers across London and the Thames Valley to a holding company.
The market price of a £400m bond issued by Thames Water (Kemble) Finance, one of the key financing entities that sits above the regulated water company, hit an all-time low of less than 50p in the pound after Moody’s unpublicised downgrade on Wednesday. The dividend was part-used to service its debt obligations.
The move comes in a week in which Thames appointed a new chief executive but its chair revealed he was speaking “two or three times a week” to shareholders to “jolly them along” before their crunch decision next year on whether to inject more equity to prop up a group with overall debts of £16bn.
The regulator introduced a new licence condition in May that places stricter restrictions on dividend payments if a company is failing customers or the environment, or if its financial resilience could be harmed. Thames is among the worst-performing major water companies and also one of the most indebted, with borrowings of almost 80% of the value of its assets versus a regulatory norm of 60%.
Ofwat’s demand for information from Thames on the dividend prompted the Moody’s review, even though the Kemble company’s rating was cut from B1 to B2 as recently as July. The new rating is B3, a lower level of junk.
The agency wrote: “Because of the further tightened regulatory scrutiny of Thames Water’s distributions, Moody’s believes that the uncertainty around the operating company’s ability to make necessary distributions has increased materially.”
Back to the UK PMI, which showed an improvement at UK service sector firms, while manufacturing remained in decline. The headline index, measuring activity across all businesses, improved to 51.7 this month from 50.7 in November.
Martin Beck, chief economic advisor to the EY ITEM Club forecasting group, said:
December’s balance was still well down on the long-run average of 53.6. There was a divergence in prospects at a sectoral level – while services activity continued to recover, manufacturing output fell more significantly than in November. The detail of the survey was equally patchy, with a modest improvement in orders in the services sector, but employment falling in both sectors.
The scope for subsequent revisions is probably greater than normal this month. With the Christmas holidays fast approaching, S&P Global/CIPS published the flash PMIs for December a week earlier than in most other months, with the survey period running for just six working days from December 6-13. In contrast, November’s flash survey was open for nine working days.
The strength of these results adds to the likelihood that this week’s downside surprise for GDP in October will prove to be a blip in what is a very noisy series. Still, with more strikes likely to weigh on activity in December, it’s hard to see GDP being much better than flat in Q4 as a whole.
With fiscal policy settings tight and the lagged impact of monetary tightening continuing to emerge, the early part of 2024 will be equally challenging. But with the effects of inflation continuing to fade, and the Bank of England expected to start cutting interest rates before the middle of next year, the EY Item Club expects UK economic prospects to improve in the latter part of 2024.
Pearson's biggest investor says it should re-list in the US
Pearson’s biggest shareholder has said that it should re-list in the US, arguing that leaving London would be better for shareholders as most of the education publisher’s business and rivals are based in North America.
The founder of Cevian Capital, Europe’s largest activist investor, said that joining the increasing number of London-listed companies moving out of the FTSE would be an “easy and effortless way” to increase the value of Pearson which has seen its market value flatline this year.
“Pearson is a US company with the majority of sales and executives there,” said Christer Gardell, managing partner of the Stockholm-based investor, in an interview with Bloomberg. “It is only due to historical reasons it is still listed in the UK.”
Pearson makes almost two-thirds of its £3.8bn annual revenues in North America.
Cevian, which successfully helped pressure building materials group CRH, one of the biggest companies on the FTSE 100, to move its primary listing to the US, after the UK-based plumbing equipment supplier Ferguson did the same last year.
Last week, Europe’s biggest package holiday operator, Tui, said it was considering moving its stock exchange listing from the FTSE 250 to solely Frankfurt.
Earlier this month, betting firm Flutter, formerly known as Paddy Power Betfair, said it is pursuing a secondary listing in the US, but will keep its premium listing in London.
H&M sales fall 4% in latest quarter
Sales at H&M have fallen, reflecting a slowdown in consumer spending and the impact of store closures in Russia.
Sales dropped 4% year-on-year between September and November, which was worse than expected. This piles pressure on the Swedish clothing retailer to ramp up discounts to clear stock, as it tackles the biggest buildup in unsold garments for more than seven years.
Excluding Russia and Belarus, sales declined by 1%. Last year, sales were boosted by a temporary reopening in Russia before H&M shut its shops there.
In late September, it said sales were down 10% that month and blamed the steep decline on an unusually warm start to autumn in Europe, even though its arch rival Inditex, the owner of Zara, did much better.
The Swedish company, which also owns the Weekday and Monki brands, and the more upmarket chains & Other Stories and Arket, is the world’s second largest fashion retailer with more than 4,000 stores, behind Spain’s Inditex, which owns Bershka, Massimo Dutti and Pull&Bear.
Inditex has fared better. On Wednesday, it reported a 15% rise for the nine months through October, and a 14% rise for the following six weeks.
Another tweet from economist Chris Williamson:
The gap has widened in terms of economic performance between the eurozone and UK, according to December's flash #PMI surveys, sending differing policy signals to the #ECB and #BOE pic.twitter.com/OsEqZXe4Nn
— Chris Williamson (@WilliamsonChris) December 15, 2023
Dave Ramsden, deputy governor for markets and banking at the Bank of England, has been talking about the banking system in a speech to the Deloitte Academy.
The UK banking system is well capitalised and has high levels of liquidity. Those are key elements in maintaining financial stability. But the overall risk environment remains challenging. That doesn’t mean I think a failure is imminent; the next real resolution weekend doesn’t start here. But as and when we are faced with another resolution we must be humble and recognise it is impossible to predict how it will unfold in real time.
No matter how much preparation is done, a resolution is always going to be complex to carry out and is almost certainly going to be messy to execute. In 2023 we have seen the successful application of key elements of the resolution toolkit including stabilisation and write-down powers, without using public funds.
But given our experience this year we must continue to invest in our toolkit and in places enhance it to ensure we have the optionality we need so that the regime remains credible. In that way we can ensure that progress on overcoming too big to fail continues for the largest banks. While ensuring that smaller banks don’t become a new source of systemic risk.
This year has been a reminder that we may need to use our powers at any time. In future we may not even have an actual weekend to deliver the resolution. To safeguard feasibility we and the firms we supervise need to maintain a high degree of operational readiness and continue to ensure resolvability as a foundation of financial stability.
He was referring to the banking collapses in the US such as Silicon Valley Bank, and the near-failure of Credit Suisse, which had to be rescued by its bigger Swiss rival USB.
Photograph: Reuters
Here’s our full story on Halifax’s house price predictions:
UK house will fall by up to 4% next year as high interest rates continue to affect mortgage affordability and sales completions, according to Halifax.
Britain’s biggest mortgage lender said the price of an average UK property will fall by between 2% and 4% but it expects a part recovery in the market as interest and mortgage rates ease next year.
“Overall, with the combination of cost of living pressures and interest rate levels that are still much higher than even two years ago, we will likely see continued mild downward pressure on house prices,” said Kim Kinnaird, the director of Halifax Mortgages.
Review finds no evidence that NatWest closes customer accounts due to political views, but urges more formal rules
An independent review has found “no evidence” that NatWest Group has been closing customer accounts due to their political views, but the lender has been urged to put in place more formal rules when it decides to end relationships for non-financial reasons, including when they do not align with its “purpose.”
The review, by the law firm Travers Smith, also said the bank may have breached rules by not explaining why those customer accounts were being closed.
The law firm found previously that NatWest’s decision to close Nigel Farage’s accounts at its private bank Coutts earlier this year was lawful, but there were “serious failings” in its treatment of the former Ukip leader.
Lawyers hired by NatWest determined that Coutts had a “contractual right” to shut Farage’s accounts, and had done so because the bank was losing money by keeping him as a client.
While Coutts also considered that there was a reputational risk of keeping Farage as a customer, it had not discriminated against him, despite raising concerns that his views on issues including migration, race, gender or Brexit did not align with its own, the law firm said.
Business growth in December was fuelled by a pick-up in the service sector. Firms talked of tentative signs of a revival in customer demand, especially for technology and financial services. However, cost of living pressures on household budgets remain, as well as subdued conditions in the construction sector.
Manufacturing production declined for the tenth month running, and at a faster pace than in November.
Rhys Herbert, senior economist at Lloyds Bank, said:
Another rise in output in December is in line with the more optimistic outlook as we approach 2024. Recent industry data has shown an uptick in business confidence, including our latest Business Barometer, which showed services sector confidence at a two-year high, and that optimism among manufacturing firms is the highest it’s been for five months.
While these positive signs are good news for businesses when it comes to future activity, we’re continuing to see business caution around the current economic climate given the delicate balancing act the Bank of England will have to consider with its interest rate decision-making next year.
Chris Williamson, chief business economist at S&P Global Markit Intelligence, tweeted:
UK avoids recession (for now at least!) as flash #PMI rises to six month high in December. However, this will add to speculation of UK interest rates remaining higher for longer, and more #BOE rate hikes cannot be ruled out depending on upcoming months' data 1/ pic.twitter.com/7PXEY46V45
— Chris Williamson (@WilliamsonChris) December 15, 2023
Updated
UK business growth rises to six-month high – PMI
The UK has fared better.
Business output growth edged up to a six-month high in December, led by a faster recovery in the service economy while factories continued to cut back production, according to the latest flash estimate from the S&P Global / CIPS purchasing managers’ index (PMI) survey. It said:
UK private sector output expanded for the second month running in December, which continued a modest recovery from the downturn seen during the three months to October. Higher levels of business activity were supported by a renewed improvement in order books, alongside efforts to work through post-pandemic backlogs.
The main index rose to 51.7 in December, from 50.7 in November, the highest since June and pointing to a faster expansion.
Flash UK PMI Composite Output Index at 51.7 (Nov: 50.7). 6-month high
Flash UK Services PMI Business Activity Index at 52.7 (Nov: 50.9). 6-month high
Flash UK Manufacturing Output Index at 45.9 (Nov: 49.2). 2-month low
Flash UK Manufacturing PMI at 46.4 (Nov: 47.2). 2-month low
Independent economist Julian Jessop tweeted:
The UK still seems to be dodging the #recession now engulfing the rest of Europe... 👇
— Julian Jessop (@julianHjessop) December 15, 2023
Flash composite #PMI (manufacturing and services) picked up again, to 51.7 in December.
In contrast, the euro area index remained <50 for the 7th month running, and shows no sign of recovery. pic.twitter.com/zo0kAKEoFR
Updated
Ricardo Amaro, lead economist at Oxford Economics, said:
Today’s flash PMI results poured a bit of cold water into the mix of recent survey results, which had so far been pointing to a turning point in high-frequency data. Indeed, the eurozone headline index partly reversed last month’s gain to stand at 47 in December, signalling another solid contraction in activity.
Overall, the aggregate PMI results for Q4 are pointing to a contraction in GDP. However, we note that the Q4 average level is broadly unchanged from Q3, when the PMIs proved to be overly pessimistic. Thus, while acknowledging the downside risk, we stick to our forecast that the eurozone economy remained stagnated in Q4. But big picture, today’s results pointed to weak momentum heading into 2024, confirming that the recovery we expect to develop through the year will start from a low base.
The ‘flash’ PMI survey suggests the eurozone is heading for recession, economists say.
Chris Williamson, chief business economist at S&P Global Markit Intelligence, tweeted:
#Eurozone headed for recession as flash #PMI falls to 47.0 in December, indicating Q4 #GDP decline of 0.2-0.3% pic.twitter.com/1cVzyxqtyZ
— Chris Williamson (@WilliamsonChris) December 15, 2023
Nationwide: Rebound in UK house prices unlikely
Nationwide building society has put out its predictions for next year, saying that a rebound in house prices is unlikely. It said they could show a low single-digit decline or remain broadly flat in 2024.
The housing market was weak throughout this year, with the total number of transactions running at 15% below pre-pandemic levels over the past six months.
Robert Gardner, Nationwide’s chief economist, said:
Even though house prices are modestly lower and incomes have been rising strongly, at least in cash terms, this hasn’t been enough to offset the impact of higher mortgage rates, which are still more than three times the record lows prevailing in 2021 in the wake of the pandemic.
As a result, housing affordability is still stretched. A borrower earning the average UK income and buying a typical first-time buyer property with a 20% deposit would have a monthly mortgage payment equivalent to 38% of take home pay – well above the long run average of 30%.
At the same time, deposit requirements remain prohibitively high for many of those wanting to buy – a 20% deposit on a typical first-time buyer home equates to over 105% of average annual gross income – down from the all-time high of 116% recorded in 2022, but still close to the pre-financial crisis level of 108%.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:
Once again, the figures paint a disheartening picture as the eurozone economy fails to display any distinct signs of recovery. On the contrary, it has contracted for six straight months. The likelihood of the eurozone being in a recession since the third quarter remains notably high.
The service sector maintains a relatively more stable position compared to the manufacturing sector, contracting at a much slower rate. This is likely attributed to the concurrent reduction in consumer price inflation, coupled with an above-average surge in wages. These factors contribute to bolstering the purchasing power of private households, a crucial element for the more consumer-driven service sector.
However, despite these elements, there are no indications of the service sector breaking free from its unsatisfactory trajectory. Quite the opposite, new business is diminishing at an accelerated pace, as is the backlog of work. Employment has teetered between marginal increases and decreases over the past five months, essentially holding steady.
He is forecasting only modest economic growth in the eurozone, of 0.8% for 2024, following 0.5% growth this year.
Eurozone business activity falls at steeper rate in December
Business activity in the eurozone worsened in December, falling at a steeper rate and closing off a fourth quarter which has seen output fall at its fastest rate for 11 years, barring only the early 2020 pandemic months.
The flash PMI reading shows the manufacturing and services sectors recorded further downturns, with both reporting steep falls in inflows of new business. Jobs were cut for a second month running.
Input cost inflation cooled but selling price inflation picked up and remained high by historical standards.
HCOB Flash Eurozone Composite PMI Output Index at 47.0 (November: 47.6). 2-month low
HCOB Flash Eurozone Services PMI Business Activity Index at 48.1 (November: 48.7). 2-month low
HCOB Flash Eurozone Manufacturing PMI Output Index at 44.1 (November: 44.6). 2-month low
HCOB Flash Eurozone Manufacturing PMI at 44.2 (November: 44.2). Unchanged rate of decline
Once again, the #PMI figures for December paint a disheartening picture as the Eurozone #economy fails to display any distinct signs of recovery. On the contrary, it has contracted for six straight months. The likelihood of the #Eurozone being in a recession since the third… pic.twitter.com/ewlRvqd3yI
— Hamburg Commercial Bank Economics (@HCOB_Economics) December 15, 2023
Updated
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said:
If you are on the hunt for gifts right now, you will not strike gold in the latest PMI survey for Germany. What you will find instead is an increasing number of companies reporting a reduction in output in both the service and manufacturing sectors. This confirms our view of a second consecutive quarter of negative growth by the year’s close, driven by the manufacturing sector.
The less-than-encouraging development could be linked to the constitutional court ruling and the subsequent discord over the 2024 budget. This has injected a significant dose of uncertainty regarding potential new burdens for the economy.
Turning to factories, he said:
Despite a recent upturn in the manufacturing stocks of purchases index over the previous two months, December brought a setback. This does not necessarily spell doom for the inventory cycle’s potential turnaround next year, but it does hint that the journey to recovery might be bumpier than previously thought. In manufacturing, new orders continue to contract rapidly, marking the 21st consecutive month of decline.
However, the index is on an upward trajectory, fuelled in part by a reduced drag from export orders. Notably, after seven months of pessimism, companies have shifted into optimistic territory regarding future output. This aligns with our perspective that the manufacturing sector is poised for a growth recovery next year.
The service sector has not fared much better.
In the realm of services, the economic landscape is still dominated by the gloomy hues of stagflation. Output has contracted for the third consecutive month, while input prices are on the rise at a pace mirroring that of November. Interestingly, companies have managed to hike their selling prices even more rapidly than in previous periods. This outcome serves as a stark reminder of the lingering risks to the inflation outlook, despite a substantial overall reduction in official consumer price inflation in recent months.
Updated
Germany’s private sector economy ended 2023 in contraction territory, with declines in manufacturing and services worsening slightly.
The December HCOB ‘flash’ PMI survey compiled by S&P Global said weak underlying demand was signalled by sustained downturns in both inflows of new business and backlogs of work, although there was a softening in the rates of contraction.
Inflationary pressures increased at the end of the fourth quarter, with firms reporting the steepest rise in output prices for seven months amid a more marked uptick in average costs.
A combination of spare capacity and efforts to reduce overheads saw employment fall for the fourth month running, and at a quicker rate. This was despite a further recovery in business expectations from September’s recent low.
HCOB Flash Germany Composite PMI Output Index at 46.7 (Nov: 47.8). 2-month low
HCOB Flash Germany Services PMI Business Activity Index at 48.4 (Nov: 49.6). 2-month low
HCOB Flash Germany Manufacturing PMI Output Index at 43.4 (Nov: 44.2). 2-month low
HCOB Flash Germany Manufacturing PMI at 43.1 (Nov: 42.6). 7-month high
European stock markets are trading cautiously higher this morning, after the European Central Bank pushed back on interest rate cut hopes, unlike the Fed which hinted it was moving closer to cutting rates.
The FTSE 100 index in London has edged 0.14% ahead, or 10 points, to 7,660, while Germany’s Dax has added 0.5%, France’s CAC rose 0.2% and Italy’s FTSE MiB was up 0.4%.
The contraction in the French economy intensified in December, when activity fell at the fastest pace for over three years, according to a closely-watched survey.
The French economy concluded 2023 with another month-on-month contraction in private sector business activity, the flash reading from the Hamburg Commercial Bank (HCOB) purchasing managers’ index (PMI), compiled by S&P Global showed.
This extended the period of decline that started at the midway point of the year. The decline in output accelerated for the first time since September and was the steepest since November 2020.
New orders fell rapidly amid an increased drag from export markets, driving further cuts to employment. Businesses also expressed less optimism over the year ahead, with growth expectations at their joint-weakest in just over three years.
Any reading below 50 indicates contraction; any reading above points to growth.
HCOB Flash France Composite PMI Output Index at 43.7 (Nov: 44.6). 37-month low
HCOB Flash France Services PMI Business Activity Index at 44.3 (Nov: 45.4). 37-month low
HCOB Flash France Manufacturing PMI Output Index at 40.8 (Nov: 41.0). 43-month low HCOB Flash France Manufacturing PMI at 42.0 (Nov: 42.9). 43-month low
Updated
The estate agent Chestertons is predicting a slow recovery in the UK housing market.
UK house prices dipped in 2023 for the first time in 10 years as the cost of borrowing soared and fewer people chose to move. By the end of 2023, we anticipate that house prices will have fallen by 2% in London and by 3% across the UK, suggesting a slowing down in the market rather than a notable correction.
House price growth over the last decade has been driven by ultra-low interest rates that made mortgages – and therefore home ownership - more affordable. It is therefore no surprise that the market has cooled as a result of the 14 interest rate rises that the Bank of England implemented between December 2021 and August 2023, moving the base rate from 0.1% to 5.25%.
Although the era of super-low interest rates is now behind us, with a degree of pain as some homeowners transition from the lower rates to the current rates, the Bank of England is now unlikely to raise interest rates further. It is even projecting small cuts in 2024 (to 5.1%) and 2025 (to 4.5%), which should allow the property market to recover as mortgage rates also start to fall.
Beyond this, the drivers of house price growth are somewhat muted. Despite falling inflation, economic growth has stalled and is not expected to recover quickly over the next two years, and unemployment is slowly creeping up. In addition, a General Election being called at some point before the end of next year, creates added uncertainty, especially for the top end of the market, which is often affected by changes to tax rules.
Reflecting the sluggish economic outlook, projections for house prices over the next two years are similarly subdued, although any interest rate cuts or tax incentives could quickly change this.
Chestertons is forecasting a small dip of 0.3% in UK house prices next year, while London prices will show growth of 1.8% due to the higher number of cash buyers that are less affected by the higher interest rates.
UK house prices will fall by up to 4% next year, predicts Halifax
House prices in the UK are predicted to fall by between 2% and 4% next year, according to Halifax, which is part of Lloyds Banking Group, the country’s biggest mortgage lender.
Pressure on household finances from inflation and higher interest rates has made a house purchase less affordable for many people, leading to fewer completions. Halifax expects a partial recovery in market confidence and transaction volumes in 2024, as interest rates ease and affordability improves.
Property prices held up better than expected over the last year, falling by just 1.0% on an annual basis, to now sit at £283,615. This resilience – which owes more to the shortage of available properties for sale than strength of demand among buyers – means average house prices end the year just 3% down on August 2022’s peak (£293,025) but £44,000 above pre-pandemic levels.
Kim Kinnaird, director of Halifax Mortgages, explained:
To some extent this masks the fluctuations we’ve seen in the housing market throughout 2023. As wider economic headwinds began to bite, house prices fell for six consecutive months between April and September, before rising again later in the year as prospects improved.
And it’s a mixed picture across the country too, with some areas still seeing annual growth, such as Northern Ireland at +2.3%, while in regions like the South East of England house prices continued to drop (-5.7%).
Higher interest rates, and the resulting squeeze on affordability, gave many potential home buyers pause for thought when considering making a move over the last year. Mortgage approvals were down a quarter across the market, while overall housing transactions were a little under 20% down – both the lowest in at least a decade.
As homeowners were hesitant to move, there was a natural reduction in the stock of available properties. Crucially, with unemployment levels only seeing a marginal increase, and many homeowners protected from the immediate impact of rising interest rates by fixed rate deals, there doesn’t appear to have been a spike in the number of ‘forced sales’ – those who feel compelled to sell but would prefer not to, typically triggered by financial pressures.
Cop28 president says his firm will keep investing in oil
The president of the Cop28 climate summit will continue with his oil company’s record investment in oil and gas production, despite coordinating a global deal to “transition away” from fossil fuels, reports our environment editor Fiona Harvey in Dubai.
Sultan Al Jaber, who is also the chief executive of the United Arab Emirates’ national oil and gas company, Adnoc, told the Guardian the company had to satisfy demand for fossil fuels.
“My approach is very simple: it is that we will continue to act as a responsible, reliable supplier of low-carbon energy, and the world will need the lowest-carbon barrels at the lowest cost,” he said, arguing that Adnoc’s hydrocarbons are lower carbon because they are extracted efficiently and with less leakage than other sources.
“At the end of the day, remember, it is the demand that will decide and dictate what sort of energy source will help meet the growing global energy requirements,” he added.
He referred to the findings of the Intergovernmental Panel on Climate Change that the world will still need a small amount of fossil fuel in 2050, even when reaching net zero greenhouse gas emissions, which is required to limit global temperature rises to 1.5C (2.7F) above pre-industrial levels.
High-end house sales are up in London, with 175 fetching £10m
Almost 200 homes in London have been sold for £10m in the past year as the super-rich’s pandemic-inspired desire for a place in the country wanes compared to their wish for swish bolt-holes in the capital.
A total of 175 homes were sold for £10m-plus in the 12 months to November 2023, the highest number for eight-years, according to research by the estate agent Knight Frank.
In 2014, when high-end sales leapt just before the introduction of higher rates of stamp duty for properties above £1m, 225 £10m-plus home were sold.
More than £3.4bn was spent on the properties, referred to as “super prime” by estate agents. That’s the highest combined figure since 2014 when £4.2bn was spent.
The figure for the full calendar year of 2023 is likely to be even higher as a number of extremely pricey sales have recently completed. This week Indian billionaire Adar Poonawalla, known as “the vaccine prince” due to his family’s vast vaccine factories, agreed to buy a mansion in Mayfair for £138m.
Ofgem ponders extra £16 charge for households to protect energy suppliers
Britain’s energy regulator has launched a consultation on a plan proposing that households pay an extra £16 on top of their energy bills to help protect suppliers from going bust due to rising bad debt.
Ofgem said that the extra charge, which would be levied at £1.33 a month on bills paid between April next year and March 2025, is to “protect the market and consumers” after figures showed energy debt has hit a record £3bn.
The level of bad debt, which refers to the amount of money owed by customers that is unlikely to realistically be repaid, has soared due to increases in wholesale energy prices and the wider cost of living crisis putting pressure on household finances.
Tim Jarvis, director general for markets at Ofgem, said:
We know that cost of living pressure is hitting people hard and this is evident in the increase in energy debt reaching record levels.
The record level of debt in the system means we must take action to make sure suppliers can recover their reasonable costs, so the market remains resilient, and suppliers are offering consumers support in managing their debts.
Ofgem said this one-off move would be less costly to consumers than if energy suppliers were forced out of business. Any extra costs would not be passed onto customers who use prepayment meters under the regulator’s proposals.
Updated
Introduction: UK consumer confidence rises; China economy on shaky ground
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Consumer confidence in the UK edged higher this month, as people became more optimistic about the year ahead. GfK’s consumer confidence index rose two points to -22.
All five sub-measures showed modest improvement. The personal finance situation for the coming year ticked up 1 point to -2, while the outlook for the general economic situation also improved by 1 point, to -25. The major purchase index rose one point to -23.
Joe Staton, client strategy director at GfK, said:
Against the backdrop of flattening economic growth, interest rates at a 15-year high and price rises potentially eroding disposable income for years to come, the index shows a modest improvement this month.
Although the headline figure of -22 means the nation’s confidence is still firmly in negative territory, optimism for our personal finances for the next 12 months shows a notable recovery from the depressed -29 this time last year.
China’s economic recovery looks shaky amid weak demand and a lingering property crisis, putting more pressure on Beijing to come up with supportive policies. While industrial output and retail sales grew in November, both were flattered by comparisons with a year ago when Covid lockdowns held back activity. They weakened compared to more typical periods.
Larry Hu, head of China economics at Macquarie, said:
Discounting the base effect, it’s obvious that China’s economy slowed further in November, especially in terms of retail sales and property.
In Asia, shares have rallied, with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.9%. Sharp declines in the dollar and US bond yields underpinned a Federal Reserve-fuelled rally, after the Fed signalled on Wednesday that it is moving closer to cutting rates.
However, the European Central Bank and the Bank of England pushed back on rate cut hopes, and the pound hit $1.276 against the US dollar, where it is still trading this morning, its highest level since late August.
Even so, Goldman Sachs now expects the first rate cut from the Bank of England in June, rather than August, after the monetary policy committee voted 6-3 to keep borrowing costs at a 15-yer high of 5.25% yesterday. Economists led by Sven Jan Stehn at the US investment bank said negative surprises to the central bank’s inflation forecasts will eventually prompt it to pivot towards rate cuts.
We expect the MPC to cut at a 25 basis points per meeting pace until policy rates reach 3% in June 2025.
European stock markets are set to open moderately higher.
Michael Hewson, chief market analyst at CMC Markets UK, explained:
After getting off to a strong start yesterday, with both the Dax and Cac 40 trading up at new record highs, European markets lost momentum after firstly the Bank of England, and then the European Central Bank decided to play the Grinch in contrast to the Fed’s Santa and push back on following a similar rate cut outlook, with the Dax finishing the session lower.
The contrast between the ECB’s tone and the Fed’s tone could not have been starker, and yet when you look at the numbers the divergence becomes even more bizarre.
Here we have a situation with the Fed announcing a dovish pivot with third-quarter GDP growth of 5% and headline CPI of 3.1%, while the ECB has maintained its hawkish stance when its two largest economies are showing a contraction in the third quarter, and its headline inflation rate is lower.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said:
The European Central Bank and the Bank of England refused to join the Federal Reserve-thrown pivot party. Both Christine Lagarde and Andrew Bailey declined to discuss cutting interest rates judging a policy loosening too early as the inflation threat looms.
Bailey pointed at the possibility of another rate hike, as three MPC members favoured hiking rates, while the ECB announced to accelerate EXIT from the PEPP stimulus, and the Norges Bank popped up with a surprise rate hike.
The Agenda
8.15am GMT: France HCOB PMIs flash for December
8.30am GMT: Germany HCOB PMIs flash for December
9am GMT: Eurozone HCOB PMIs flash for December
9.30am GMT: UK S&P Global/CIPS PMIs flash for December
10am GMT: Eurozone trade for October
10am GMT: UK Bank of England Dave Ramsden speech
2.15pm GMT: US Industrial production for November
2.45pm GMT: US S&P Global PMI Flash for December
