A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

Global economic activity is proving more resilient than expected. Lower gas prices, an easing of inflation pressures and a rebound in China’s economy have all helped. The timeliest measure of activity comes from the Purchasing Managers’ Index (PMI). The global PMI trended down from the summer of 2021, deteriorating rapidly in the second half of last year, but has rallied since December. On this one indicator, far from slowing or even contracting, global activity may have picked up in the first quarter of this year.

In the UK, official data points to a modest improvement in the momentum of activity. UK GDP rose unexpectedly in the fourth quarter of 2022, by 0.1% after a third quarter decline of -0.1%, enabling the UK to avoid a technical recession in the second half of last year. Consumer confidence is depressed but has risen from the all-time low it hit last September. Aided by an easing of supply problems, new car sales were 18% higher in the first quarter of this year than a year earlier. Employment has continued to rise and the unemployment rate is close to its lowest level in 50 years. Although manufacturing profitability has suffered because of high inflation and slowing global demand, companies operating in the service sector and energy continue to post healthy levels of profits.

Helped by firmer activity data, sterling has been the best-performing developed world currency in 2023. Last week it reached its highest level against the US dollar in ten months. Economists have nudged up their growth forecasts for the UK, as well as the US and the euro area, since the start of this year.

We shouldn’t get carried away. Sentiment about the UK has been helped partly by the fading memory of the financial and political chaos that followed last September’s mini-budget. The pound, for instance, hit a 37-year low against the dollar in late September since when it has risen by 13%. While the latest data have been on the firmer side of expectations, the overall picture for the UK remains uninspiring.

Monthly GDP data shows UK activity flatlined between January 2022 and January 2023. Manufacturing output, which accounts for almost 10% of GDP, has been declining for over 18 months. Inflation has outstripped growth in average earnings for most of the last two years depressing spending power. Housing market activity has nosedived, with housing transactions, mortgage approvals and prices softening. The volume of retail spending was 4.9% lower in the three months to February than a year earlier.

Stresses are also starting to emerge. Corporate insolvencies have risen sharply, up 57% last year. Rising interest rates mean that credit is scarcer and more expensive, with the full effects of rate rises yet to feed through fully for the majority of mortgage holders on fixed-rate deals. The Office for Budget Responsibility thinks that real household disposable incomes will fall by 2.6% this year on top of an estimated decline of 2.5% in 2022. Falling numbers of job vacancies point to a softening in labour market activity. Problems among US regional banks, and Credit Suisse’s hasty merger with UBS, highlight potential challenges in the wider financial sector at a time of sluggish growth and rising interest rates.

All that said, this year has not, so far at least, proved quite as challenging as had been expected. If western economies can overcome a bout of double-digit inflation without falling into recession, they will have pulled off a remarkable feat. For us an economic ‘hard landing’ is more likely, and more consistent with experience – but a ‘soft landing’ looks less improbable now than it did at the start of the year.

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