Although you can still keep up to date with our full predictions, we’re taking a break from assessing the Autumn Budget babble this week. Instead, we’re going to talk about something a bit more positive and, hopefully, less painful – our revamped economic indicators. These will help cut through some of the economic noise, give a different perspective on where the economy is going and complement our industry focus.

Let’s start off with the Real Economy Barometer. We typically talk about GDP, which is the broadest measure of how the economy is doing. That’s usually fine, but it can be influenced quite heavily by what’s going on in the public sector, which makes up about a third of the economy. If you’re an economist, the number of operations done by the NHS or how many children were in school last month matters. If you’re a business, not so much. So, our Real Economy Barometer strips out all the public sector noise, plus super-volatile elements (like oil production), which gives us a much clearer idea of how businesses are performing.

The latest UK data suggests that the real economy stagnated in Q3. That’s even more dismal than the 0.1% growth the whole economy managed to squeeze out in Q3. Admittedly, the Jaguar Land Rover (JLR) and its supply-chain shutdown contributed significantly to this and explains most of the weakness in the real economy. However, real economy services only managed 0.1% growth in Q3, compared to 0.2% in the official figures.

The bigger picture, though, is more positive. The real economy has averaged annual growth of 1.4% so far this year. If sustained, then that would be the fastest pace since 2018, excluding the post-pandemic recovery

Next up, we have the Credit Impulse. This measures the flow of new credit to households and businesses. It helps us predict where the economy is going. The logic here is that businesses typically borrow to invest and households to consume. So, an increase in new credit flows suggests stronger business investment and more consumer spending and vice versa.

The latest data here is more positive. After a long period of negative credit flows, the Credit Impulse suggests that firms and households have largely shrugged off Autumn Budget uncertainty and have been borrowing more. This may take a hit over the next couple of quarters, but falling borrowing costs – both in terms of the base rate and gilt yields – should help to reduce the cost of financing for businesses and consumers.

Finally, there’s the Financial Conditions Index (FCI). This combines all the financial variables that matter for businesses and the economy, such as equity markets, interest rates and bond spreads, into one metric and then indicates whether financial conditions as a whole are looser or tighter than historically.

The logic here again is simple. Lower interest rates and tighter spreads make it cheaper and easier for businesses and households to borrow and spend, and high equity markets make consumers more likely to spend. More borrowing and spending tend to lead to stronger growth.

Financial conditions are currently +1.4 deviations above normal, which means they are currently supportive of borrowing and spending. This should support investment over the coming quarters. It’s also at its highest since the post-pandemic and pre-Brexit period. That’s a sharp improvement from April when new US tariffs caused market panic and dragged financial conditions down to zero.

The recovery has largely been driven by equity markets, with the FTSE 100 up over 20% in the last year. Bond markets also remain supportive of growth. The premium on corporate bonds over government debt is at the smallest level since the Great Financial Crisis (GFC), which means firms can borrow relatively cheaply. That should also help growth.

Ultimately, the Financial Conditions Index suggests that stress in financial markets remains low by historic standards. We’ll be keeping a close eye on the FCI in the lead up and aftermath of the upcoming Autumn Budget. If markets think the Chancellor’s plans lack credibility, then we’re likely to see this here.

Inflation will probably fall to 3.5% in October from 3.8% previously and will stay at that level until January, which is when we expect a bigger drop because some of tax and regulated prices hikes start to fall out of the annual comparison. For the same reason, the next big drop in inflation will be in April.

On the details, the main factor driving the fall in inflation will come from Ofgem’s utility price cap. Ofgem raised the price cap by 2% in October, but around this time last year it rose by 9.6%. This will slash around 0.2ppts off inflation.

We also expect volatile airfares inflation to drag services inflation down to 4.6% from 4.7% previously.

Looking ahead, the big question is whether there’ll be another round of stagflationary tax hikes at the Autumn Budget, which would prevent inflation from falling back below 3% early next year.

Retail sales have grown strongly over the summer, posting four months of consecutive gains. This is the longest positive streak since the post-pandemic recovery. However, a small monthly fall in October means we think that’s likely to go into reverse.

The BRC measure of retail sales slowed slightly in October, even after adjusting for inflation and any seasonal effects in the data. It suggests that the official measure should lose some momentum too as Autumn Budget uncertainty starts to bite and prompts consumers to wait and see what the Budget holds before spending on big-ticket items.

Admittedly, consumer confidence rose in October. This was driven by younger consumers, who have proven to be a more reliable indicator of spend recently. Major purchasing intentions also recovered from September’s fall. Both components are consistent with a small rise in annual retail sales growth.

However, October 2024 was a poor month for retail sales. So, even a slight drop this October would see the annual measure of retail sales improve, which is consistent with the improving surveys data.

All told, retail sales will fall slightly in October. The bigger picture is that retail sales have been improving so far this year. The question going forward is to what degree households offset the impact of higher taxes through lower saving and discretionary spending.

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