There was largely solid economic data from the UK this week, helping the pound hit its highest level against the euro since the EU referendum. The pound rallied on strong employment data and hopes for stimulus such as infrastructure spending in the forthcoming budget, while disappointing data out of Germany weighed on the single currency. A survey of German economic expectations by the Zew economic research institute fell to just 8.7 points in February which despite remaining positive it’s down from a reading of 26.7 in January and way below the 21 points expected. The Zew institute said the poor showing was due to worries about the impact of the coronavirus on world trade. The pound/euro exchange rate rose as a result, with £1 buying over €1.20, its best level in over three years and signalling good news for British holidaymakers and many businesses.
In the UK, the latest employment data from the Office for National Statistics (ONS) showed unemployment remaining at a near-record low of 3.8%, while the proportion of active people in work rose to 76.5% in the three months to December 2019. That was up from November’s reading of 76.3%.
However, other data from the ONS showed that while average real wages (which take account of inflation) have now finally risen above their pre-financial crisis levels for the first time, the pace of wage growth actually slowed at the end of last year. Estimated annual growth in average weekly earnings fell to 2.9% from 3.2% (including bonuses) and to 3.2% from 3.4% excluding bonuses in the three months to December. After adjusting for inflation, average total pay excluding bonuses grew by 1.8% in the quarter, enough to lift wages to their highest level in more than a decade.
The ONS also released its latest inflation data this week, which showed a jump in the annualised inflation rate to 1.8%, its highest level in six months. The rise, which takes inflation closer to the Bank of England’s target rate of 2%, was attributed to rising energy and fuel costs. Prices charged for clothing, restaurants and hotels also rose, offsetting a fall in the cost of furniture and household equipment due to heavy discounting by retailers. Taken together, the data weakens the case for an interest-rate cut by the Bank of England, which is now largely expected to keep rates on hold this year.
More upbeat news came from the ONS’s measure of retail sales, which showed a surprise uplift in January, ending a record run of shrinking sales. The total volume of retail sales rose by 0.9% in January, the biggest increase since last March. However, in a cautionary note, the ONS emphasised that over the three months to January, sales in fact fell by 0.8%. Rhian Murphy, head of retail sales at the ONS, said there were "declines across all sectors" during the quarter.
Meanwhile, the coronavirus outbreak continues to wreak havoc in China and beyond. Analysts have forecast that the Chinese economy will suffer its worst quarterly performance since 1989, when the Tiananmen Square protests caused a national crisis. As a result, the Chinese government has taken steps to boost the economy, lowering a key interest rate and increasing liquidity. Nevertheless, on Thursday, S&P Global Ratings said that China’s pace of economic growth this year could fall to as low as 4.4% if the virus does not start abating by April. If it peaked in March, S&P estimated growth for this year of 5%. Either figure would be sharply down on last year’s 6.1% growth rate. Japan is also suffering for a number of reasons, and revealed this week that its economy shrank at an annualised rate 6.3% in the last quarter of 2019, due to a number of reasons including bad weather and a hike in its sales tax.
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