The Week Ahead: Is the UK slipping back into recession?

The upcoming batch of jobs data is likely to show a tick up in pay growth. The rise is largely anticipated and shouldn’t carry much bearing for the BoE.

We forecast private sector pay growth will climb to 5.0% in the three months to October, from 4.8% previously. Base effects will drive the increase, as a monthly drop in pay at the same point last year isn’t repeated.

If we’re right, this will leave the gauge roughly on track to match the BoE’s latest forecast of 5.1% for Q4 24. Whole economy wage growth will accelerate by 0.2 ppts, from 4.8%.

A low response rate continues to distort the Labour Force Survey and our best guess is that the unemployment rate will hold unchanged at 4.3% in the three months to October. Alternative data, however, leaves little doubt labour demand has cooled in recent months.

That won’t prompt the central bank into faster rate cuts alone. Underlying private sector wage gains are still running above what’s typically been consistent with a 2% inflation and services disinflation is progressing only slowly — our base case is for a gradual easing of policy.

Headline CPI inflation likely accelerated in November, to 2.6% from 2.3% in October. The BoE pencilled in a reading of 2.4% in its November forecast.

The rise in the headline rate will be driven by faster core goods price inflation as the unusually large fall in prices in 2023 falls out of the annual comparison. An increase in tobacco prices on the back of the duty rise in the budget is also likely to lift headline inflation.

Services inflation, which is a key metric for the BoE, will likely hold steady at 5%, 0.1 ppt above the BoE’s forecast. We expect the gauge to remain between 4.5% and 5% until April 2025, when a more modest annual indexation of prices compared to 2024 prompts a drop closer to 4%. The rise in employer National Insurance Contributions (NICs) will prevent a more material slowdown as firms pass higher labour costs into prices.

The gradual easing of services inflation supports the case for the BoE moving slowly. We think it will cut at a quarterly pace in 2025.

The BoE will likely stick to the script at its final meeting of the year, keeping rates steady and signalling that it intends to ease gradually through 2025. Governor Andrew Bailey recently indicated that he sees four rate cuts next year – that outlook is consistent with our forecast.

We expect the benchmark rate to remain at 4.75%. We’ve pencilled in an 8-1 vote split with Swati Dhingra favouring a 25 basis point rate reduction.

The MPC’s guidance is likely to remain unchanged with the committee sticking to the line that “a gradual approach to removing policy restraint remains appropriate.”

The minutes are likely to emphasise that the response of firms to the rise in employer NICs remains the key uncertainty surrounding the outlook, supporting the case for proceeding slowly with rate cuts.

We expect UK retail sales to have rebounded in November as uncertainty around the Autumn Budget dissipated and more households took advantage of Black Friday concessions. 

While many consumers still feel the hangover from the cost-of-living crisis, the pressure is easing as wage growth continues to surpass inflation, leaving more change in people’s pockets.

Anecdotal evidence suggested buyers of big-ticket items held back for Black Friday discounts in November. The BoE’s rate cut in November will also boost the spending power of about 18% of households on variable mortgage deals.

Overall, the removal of uncertainty around the Budget, seasonal concessions, the November rate cut, and, ultimately, an increase in real wages are likely to bolster sales ahead.