While businesses are reporting increased activity and inflation is finally heading in the right direction, costs for owner-occupiers are rising at record rates
UK inflation data is still going in the right direction. The rate of inflation, on the measure that includes owner occupier housiing costs, (CPIH), was 3 per cent in the 12 months to April 2024, down from 3.8 per cent seen in the 12 months to March.
Looking just at the consumer goods and services element of this data, the Consumer Price Index (CPI), the rate of inflation in the 12 months to April slowed to 2.3 per cent, edging closer to the government’s 2 per cent target and down from 3.2 per cent in March.
Rapidly falling gas and electricity prices was one driver along with slower prices rises in food and non-alcoholic beverages (2.9 per cent), alcohol and tobacco (8 per cent down from almost 12 per cent), recreation and culture (4.6 per cent) and communications (4.1 per cent). Motor fuels inflation (the rate of increase rather than prices at the pumps) fell for the 14th consecutive month in April.
Restaurants and hotels was one sector contributing to the upward pressure, with prices rising by 6.1 per cent in the 12 months to April.
Housing costs for owner- occupiers also rose by 6.6 per cent in the 12 months to April 2024 (and up month-on-month by 0.3 per cent on March) as mortgage rates began climbing again. The Office for National Statistics (ONS) notes that this component of costs is now rising at the highest annual rate since July 1992.
Housing is likely to be a key theme of the General Election. In addition to increasing owner- occupier costs, private rents have also risen further. According to the (in development) ONS private rent data, average Scottish private rents rose by 10 per cent in the 12 months to April (a provisional estimate), against almost 9 per cent across the UK.
Although still high, at the UK level this represented a monthly slowdown, the first since December. The rate of Scottish rent increases also slowed slightly in April (relative to March) and has been slowing since August. However, it is worth noting again that the Scottish data in this series is mainly for advertised new lets not subject to the price cap so it doesn’t give a complete picture of the market and also that rates of increase while slowing remain high.
Although inflation has fallen closer to the target, the April fall was not as large as expected lead- ing the Bank of England to hold its base rate unchanged in May at 5.25 per cent, the highest level for 16 years.
While we might have ordinarily expected a rate cut soon if inflation continues its current downwards trajectory, the announcement of a General Elec- tion on 4 July may postpone any cut until after the result.
Consumer sentiment falls and retail sales down
Despite slowing price rises (and falls in some areas), households are still feeling the pinch. A survey of British households in May indicated a majority are still feeling the impact of rising costs with 55 per cent citing an increase in their cost of living compared to a month ago, a slight drop on the April figure, but still higher than the start of the year.
The increased cost of living is one reason the Scottish Consumer Sentiment Index fell again in the first quarter of the year, down by 1.1 per cent on the last quarter of 2023, the eighth consecutive decrease.
Four of the five drivers of the index, including the outlook for the economy, household finances and attitudes to spending weakened, with only sentiment about the current economic economy improving (from negative to slightly less negative).
Consumers remain cautious with their spending habits. New data from the Scottish Retail Consortium-KPMG shows retail sales rose in May by 0.7 per cent, but much more slowly than the same time last year and below the 12-month average. However, while food sales rose, non-food sales declined at a steeper than average rate (-2.4 per cent) with the mixed May weather partly to blame. Some categories did grow – clothing, computing and DIY sales over the bank holiday weekend. Retailers are hopeful that the reduction in National Insurance and the many summer sporting events will finally boost sales this summer.
Private sector activity continues to expand
The Royal Bank of Scotland Business Activity Index remained positive in April (53.8), rising very slightly on the March figures (53.6). The index measures private sector business activity in Scotland. April’s data was the sharpest rise in business activity for a year.
Strong services activity and new business drove the rise, offsetting a drop in manufacturing orders and output. However, the gap between activity levels for services and manufacturing is reportedly the highest for the 26 years of the survey.
Expectations for future business activity levels are positive, though at a five-month low and the lowest of all nations and regions monitored.
In contrast, data from the Fraser of Allander Institute/ Addleshaw Goddard’s Scottish Business Monitor in April indicated firms were more positive than before so we may need to see a further quarter’s data for a clearer picture of the trend.
Supply chain disruption has also become less of an issue for business according to the Scottish Government’s business insights data, affecting just 4 per cent of businesses.
However, costs remain a challenge. The Scottish Business Monitor data tells us that 83 per cent of firms in Scotland reported an increase in costs in the first quarter of this year (up from 78 per cent), with costs rising in every category.
In addition, 85 per cent of Scottish businesses expect their total business costs to keep rising over the next six months, a higher proportion than the previous quarter (67 per cent), driven by higher expectations for total employee costs and wages.
Rate of wage increases slowing
The number of employees is going up but more slowly. Experimental HMRC data shows that the number of payrolled employees in the year to April 2024 in Scotland rose by 0.3 per cent (compared to UK growth of 0.4 per cent). However, compared to the previous month this represented a small contraction.
The employment rate, the proportion of the working age population in employment, has also dropped. The employment rate for those aged 16 to 64 years in Scotland was 73.1 per cent in the first quarter of the year (74.5 per cent in the UK). This was a fall on both the previous quarter (-1.2 per cent) and the year (-1.6 per cent). Unemployment also rose slightly over the period to 4.4 per cent in line with the rest of the UK.
Pay is still rising ahead of inflation. Early estimates suggest Scottish payrolled employees saw a pay increase of 4.8 per cent in the year to April 2024 (based on median monthly pay), a continuation of the slowing trend for wage rises. This was a lower rise than across the rest of the UK (6.9 per cent).
UK data suggests employees in the accommodation and food services (9 per cent) saw the biggest increase in the month, while those in the professional, scientific and technical sectors saw the slowest (5 per cent).
A quarter of Scottish employers reported facing recruitment difficulties in May according to Scottish Government Business Insights and Conditions Survey (BICS), with the shortages most severely felt in construction businesses (38 per cent) and admin and support services businesses (33 per cent).
Economic activity and outlook improves
Last quarter we reported the UK was in recession. Conditions have since improved as UK GDP grew 0.6 per cent in the first quarter of this year driven by both services and manufacturing.
The more broad-based expansion saw 13 of 20 subsectors expand (compared to just six the previous quarter) with transport and storage, professional scientific and technical activities and transport equipment among the strongest performers.
in the year to April 2024 Scottish output has also grown with onshore GDP expanding by a robust 0.7 per cent in the first quarter of this year.
The construction sector overall contracted and growth was driven by the expansion of the services sector which grew 0.7 per cent, with the retail, wholesale and motor trade and health and social care sectors expanding fastest.
EY’s latest May ITEM Club forecast suggests Scottish GDP growth of just 0.4 per cent for 2024 overall rising to 1.7 per cent over the next three years (against the 0.7 per cent it fore- cast for the UK this year and 1.8 to 2 per cent thereafter).
Fraser of Allander/KPMG is more optimistic for Scottish output for this year (0.6 per cent), with more modest growth forecast the next two years of just over 1 per cent. These forecasts may be revised upwards if the strong performance of the first quarter is sustained. Put in context, UK GDP in the first quarter is an improvement and well ahead of many competitors.
However, for 2024 as a whole the UK is expected to see the second lowest growth in both the OECD’s and the IMF’s latest G7 country forecasts behind Germany, with the US and Canada expected to lead the pack.
A Covid-era financial stimulus, flexible jobs market and less dependence on imported energy are some of the reasons credited with boosting the US economy.