• UK economic growth remains weak, inflation persists and government borrowing costs rise
• Mortgage market activity stalls in November, but momentum expected to continue over coming months fuelled by changes to first-time buyer stamp duty changes
• Households savings balances grow again in November, having grown strongly all year

Economic growth stalls and the threat of higher inflation persists

1. UK GDP was estimated to have not grown in Q3 2024 and to have contracted by 0.1% in October due to a decline in production output. According to the latest independent forecasts, GDP growth is expected to be anaemic in 2024 at 0.8% and slightly higher in 2025 at 1.3%. Much of this growth is expected to come from public sector spending initiatives. There is concern that the decision to increase employers’ National insurance contributions will weigh on private sector growth in coming years. The Bank of England have also raised concerns that higher labour costs could raise inflationary pressures, depending on how firms react. A recent survey by the British Chambers of Commerce shows that over half (55%) of mainly small / medium sized businesses expect prices to rise over the next three months up from 39% in last quarter. Only 20% of businesses say they have increased investment plans over the last quarter, down from 23% in Q3 and 24% of firms say they have cut back investment plans, up from 18% in Q3.
    
2. The UK labour market was a mixed picture in August to October. Whilst the unemployment rate increased to 4.3%, up from 4.1% in the previous three months, average total earnings accelerated to 5.2%, up from 4.9%. In real terms, adjusting for CPI, total average earnings grew by 3.0%. However, the number of job vacancies continued to fall, with 818,000 jobs available in September to November – down by 31,000 from June to August and is the 29^th consecutive fall.
    
3. CPI inflation was 2.6% in the year to November, up from 2.3% in October. This rise was driven by increases in transport costs. The closely watched CPI services measure remained unchanged at 5.0% and core CPI (which excludes volatile items) increased from 3.3% to 3.5%. The ongoing concerns over the impact of measures announced in the budget are having a significant impact on the UK’s borrowing costs. On 8 January UK borrowing costs (10yr gilts) reached their highest level since the financial crisis. Depending whether this shift in borrowing rates persists, it could impact the government’s spending plans outlined in the budget and put more pressure on the upcoming spending review. The impact on monetary policy is not clear: tighter financial conditions could lead the MPC to accelerate cuts to Bank Rate to offset this, but the accompanying fall in the pound could lead to import inflation.
    
4. The expected path of Bank Rate has become shallower with current market prices showing Bank Rate at around 4.27% in a year (grey line in chart), compared to 3.92% a month ago (blue line), and in five years, it is expected to be 4.07% compared to 3.54% a month ago. More generally, MPC member Sarah Breedon gave a speech on Thursday indicating she saw the threat of persistent higher inflation having reduced, so that there was more scope to reduce Bank Rate.
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