As students return to their academic endeavours, we too are back with an update from our Clash of the Titans economic forecasting competition. We’ll delve into the complexities of Q2’s economic variables, reflecting on another period of intriguing developments in the UK’s economic landscape.
GDP Growth
The UK’s economic performance in Q2 2024 has shown a resilient stride with a steady GDP growth of 0.6%, maintaining the momentum observed from the previous quarter’s 0.7% increase.
In Q2, the services sector emerged as a notable driver of this growth, expanding by 0.8%. This widespread growth across services offset the slight declines observed in the production and construction sectors, each falling by 0.1%.
The expenditure side of the economy also reflected interesting shifts, with increases in gross capital formation and household spending. These were, however, partially offset by falls in net trade, illustrating the complex interplay of domestic and international economic activities.
As we look towards the latter half of the year, the projections remain cautiously positive, with underlying momentum appearing weaker than headline figures suggest.
Labour Market
The labour market figures from Q2 2024 paint a picture of a UK economy that is gradually adjusting to post-pandemic realities, with modest shifts reflecting a complex interplay of factors influencing employment and wage dynamics. The unemployment rate has dipped slightly to 4.2%, indicating a stable job market that contrasts with the volatility seen in recent years. This stability in unemployment rates, coupled with a modest increase in both the total number of people in employment and payrolled employees, suggests that businesses are cautiously optimistic, maintaining or slightly increasing their workforce sizes.
However, the data also hints at underlying challenges. The number of vacancies has decreased for the 25th consecutive period yet remains above pre-pandemic levels, suggesting that the labour market is still in a phase of normalisation.
The slight slowing in the annual growth of regular earnings to 5.4% indicates that wage growth is stabilizing, but this comes amid ongoing inflationary pressures that could erode real wage gains. The fall in total earnings growth is particularly sharp, from 5.9% to 4.5%, was influenced heavily by the high base effect of last year’s NHS one-off bonus payments.
Inflation
Inflation has held steady at the Bank of England’s target of 2%, underscoring a period of relative stability. However, forecasts suggest a rise to around 2¾% in the latter half of the year, largely due to base effects from last year’s energy price declines fading from the annual comparison.
The subtleties of the inflation picture are evident in the sectoral breakdown. Services inflation remains elevated, with a notable rise in the cost of services indicating persistent domestic inflationary pressures despite a general stabilization in goods prices. This divergence highlights a shift where services, driven by robust wage growth and resilient consumer spending in specific sectors, continue to prop up overall inflation. Particularly, the rise in restaurant and hotel costs reflects a rebound in consumer demand, contrasting with the more tempered increases in other areas such as clothing and footwear, which saw prices actually decline.
This dynamic suggests that while headline inflation aligns with the target, underlying pressures remain, particularly in consumer-facing sectors that are sensitive to changes in disposable income and consumer confidence. The persistence of services inflation, in the face of falling goods prices, points to structural shifts in the economy where service-oriented sectors might be experiencing cost-push factors such as wage increases and rent hikes, which are passed on to consumers.
The mixed signals from the inflation data necessitate a cautious approach from policymakers, who must balance supporting growth with preventing runaway inflation.
Interest Rate
The Monetary Policy Committee’s (MPC) decision to reduce the Bank Rate by 0.25 percentage points to 5% in July 2024 reflects a finely tuned response to the UK’s current economic conditions laid out above. This decision, arrived at with a narrow majority vote of 5-4, underscores the complexities of balancing growth with inflation control at a time when economic indicators present a mixed picture.
The modest reduction in the Bank Rate is a strategic move to slightly ease the degree of policy restrictiveness. This decision is based on a combination of factors that suggest a shifting economic environment: CPI inflation has stabilized at the 2% target, but there are anticipations of a rise due to the dissipation of last year’s energy price reductions. Moreover, despite a relatively robust GDP growth in the early half of the year, there’s an underlying weakness in economic momentum that the MPC is attempting to mitigate.
The debate within the MPC highlighted divergent views on the future trajectory of inflation and economic growth. The slight majority opting for a rate cut pointed to a consistent but gradual decrease in wage growth, suggesting that inflationary pressures might be waning more persistently than previously anticipated. This group believes that reducing the interest rate could help support economic activity without reigniting inflationary pressures, especially as the economy shows signs of cooling.
Conversely, the dissenting members expressed concerns about enduring inflationary pressures, particularly from the service sector, which could indicate deeper and more persistent inflationary undercurrents not fully captured by headline figures. They argue for maintaining the rate to avoid premature easing, which could complicate future policy decisions if inflation does not remain at target as projected.
Titans Performance Review
The Clash of the Titans competition has showcased the formidable challenge of economic forecasting through its dynamic leaderboard shifts this quarter.
Costas Milas currently leads, impressively climbing to the top with 67 points despite none of the Titans nailing the Q2 variables exactly. His astute projections have demonstrated a keen insight into underlying economic trends.
Emily Whitehouse, previously tied for the lead, now finds herself slightly trailing at 70 points.
Michael Kitson, who remains a strong contender at 109 points, has shown expertise, particularly in his accurate foresight during previous quarters. Although he has fallen slightly behind this quarter, his earlier prediction success suggest there is all to play for.
This quarter’s scoring reflects the difficulty of making long-range forecasts amid volatile economic conditions. As we advance, the competition remains fiercely open, with each economic update potentially reshuffling the standings, adding a layer of intrigue and educational value to the forecasting challenge.