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Mixed messages from the UK economy - inflation falls, real wages rise but retail sales are down.

Brexit woes were mixed with largely welcomed UK economic news this week. Wages were reported as rising at their fastest pace in nearly 10 years – a welcome boost for household finances. The Office for National Statistics (ONS) said that earnings excluding bonuses rose by 3.1% in the three months to August compared to 12 months earlier, beating expectations and outstripping the 2.9% rise in the three months to July. Economists said that low unemployment was at last pushing up wages, as has historically been the case.

The data came alongside figures showing that unemployment held steady at 4 per cent, although the number of people in work dropped by 5,000, against expectations of a rise. The following day the ONS reported inflation falling sharply in September, from 2.7% in August to 2.4% in September. The news means that, on average, UK earnings are at last outstripping inflation.

The drop in inflation was due to falls in the prices of video games, package holidays, clothing and transport, and will take pressure off the Bank of England to raise interest rates in the near future. Ideally, any decision would wait until uncertainty around Brexit is resolved, but that appears to be some time away; a Brexit summit scheduled for next month was cancelled on Wednesday evening, with both sides saying they had reached a deadlock over the Irish border issue and there was little point in more talks at this time. Theresa May has indicated that she is prepared to extend the transition period to give enough time to solve the problem. That means that Britain could be tied to the EU beyond the scheduled transition period end date of December 2020. This news angered MPs from all camps and rumours of a leadership bid have intensified. Meanwhile, European countries such as France and Germany were said to be stepping up preparations for a disorderly Brexit.

UK retail sales dropped in September after a strong summer, with food sales recording their biggest month-on-month drop in three years. Volume of overall retail sales dropped by 0.8% but food sales were down by 1.5% in the month. The data, from the ONS, suggested that overall sales still grew in the quarter thanks to strong sales in July and August. Somewhat ironically, the figures came just a day after the ONS reported that falling food prices had helped cut inflation in September.

China reported its worst quarterly economic growth figures since the depth of the financial crisis on Friday. Year-on-year growth came in at 6.5%, down from an annualised 6.7% the previous quarter, prompting Vice Premier Liu He to defend the country’s outlook, dismissing impacts of the trade war as largely “psychological.” Meanwhile in the US, consumer spending slowed sharply in September. Total retail sales grew by just 0.1% in the month, far short of forecasts for 0.7% growth. Sales of home appliances and electronics were the biggest gainers, although economists expect sales growth to slow further in the fourth quarter as the boost from Trump’s tax package fades. In Europe, the EU rejected Italy’s budget proposals and its bond yields spiked higher as a result, reflecting a perception of increased risk.

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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

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