UK wage growth picks up further as labour market remains tight
Ahead of tomorrow’s UK inflation data, this morning’s labour market figures were a mixed bag. Most concerning for the BoE will be a further stronger-than-expected pickup in the annual rate of average pay growth, which accelerated 0.2ppt in total and 0.3ppt excluding bonuses, with both rates up to 6.4%3M/Y in the three months to November. The overall rate was a six-month high with the ex-bonuses figure up to a sixteen-month high. However, the recent trend for private sector regular pay remained unchanged at 1.8%3M/3M, admittedly the top of the range since the end of 2020. The equivalent rate for public sector regular pay jumped 0.5ppt to 1.7%3M/3M, the most since July 2020 – perhaps a reflection of ongoing staff shortages and industrial action in the sector.

Among the other detail, the unemployment rate for the three months to November 2022 came in at 3.7%, up 0.2ppt (or 56k workers) from the prior three months but still 0.3ppt (120k) below the level ahead of the arrival of the coronavirus. The employment rate was unchanged over that same period at 75.6%, still 1.0ppt (or 292k workers) below the level just ahead of the pandemic. So, the rise in unemployment reflected a small drop in the inactivity rate of 0.1ppt (55k) to 21.5%, leaving it 1.3ppt (575k) above the pre-pandemic level. Total weekly hours worked dropped slightly over the same period, reflecting the weakness of economic activity. The redundancy rate continued to drift up to the highest in just over a year, albeit remaining low by historical standards. And the number of vacancies continued to edge lower, down 6.1% or 75k in the three months December, and falling in 14 out of 18 sectors. That left them down 85k from a year earlier, albeit still 365k above the pre-pandemic level. While the ratio of unemployed people to vacancies edged back up in the three months to November, at 1.0 it remained consistent with a very tight labour market to maintain BoE concerns about ongoing wage pressures ahead and probably guarantee a hike of 50bps at the MPC’s policy meeting in early February.

Despite exceeding expectations, Chinese GDP stalled at the end of 2022 amid ongoing Covid-disruption
According to the National Statistics Bureau, Chinese GDP beat expectations in the final quarter of 2022 and avoided a contraction. Nevertheless, today’s data still suggested that activity stalled in Q4 as the spread of new Covid infections took its toll, to leave the annual rate of growth down 1ppt to 2.9%Y/Y, the third softest reading since the start of the pandemic. Indeed, full-year growth slowed to 3.0%Y/Y in 2022 from 8.4%Y/Y in 2021, well below the government’s 5½% target and the second-softest pace since the series began in 1978.

December’s activity data also exceeded expectations, although they were still consistent with a marked slowdown at the end of last year. In particular, retail sales fell 1.8%Y/Y in December, to leave them down 0.2% in 2022 following an increase of 12½% in 2021 amid a marked slowdown in real household disposable income growth from 8.1% in 2021 to 2.9%Y/Y in 2022. Industrial production avoided a contraction in December, with growth of 1.3%Y/Y nevertheless the softest since May and full-year growth (3.6%Y/Y) some 6ppts weaker than in in 2021 and only marginally stronger than growth in 2020. But while fixed asset investment growth remained positive in 2022 (5.1%Y/Y), the ongoing retrenchment in real estate was clearly evident, with the decline in property investment intensifying to -10%YTD/Y, the first full-year drop since the series began in the early 1990s. While December might well mark the trough in activity in China, the near-term outlook remains highly uncertain not least due to the risk of another surge in Covid cases during next week’s Lunar New Year holiday as well as the impact of slowing global demand.

Japanese tertiary activity slips back in November, but on track for positive growth in Q4
Japan’s tertiary activity fell short of expectations in November, with activity unexpectedly declining 0.2%M/M. Admittedly, this followed upwardly revised growth in October (to 0.5%M/M), to leave output in the sector trending 0.5% above the Q3 average, albeit still more than 1½% below the pre-pandemic peak in February 2020. Within the detail, accommodation services activity rose sharply in November (12.4%M/M), boosted not least by the government’s domestic travel incentive scheme as well as the relaxation of international travel restrictions. But this was offset by a decline in services related to eating out (-8.3%M/M), retail trade (-2.0%M/M) and real estate (-3.0%M/M), likely reflecting the impact of the ongoing decline in households’ real disposable incomes. Overall, taken together with persisting weakness in the manufacturing sector – output in the first two months of Q4 was trending more than 3% below the Q3 average – there is still a good chance that Japanese GDP failed to grow in the final quarter of last year.

ECB Chief Economist flags need for further tightening, but ready to pivot if the inflation outlook shifts
In an interview this morning in the FT, the oft-dovish ECB Chief Economist Philip Lane flagged the need for ongoing tightening over coming months. While he judged that rates were now back in the “ballpark of neutral”, he also judged that risks to the inflation outlook remained skewed to the upside and were likely to remain that way for the “next year or two”, requiring a shift into “restrictive territory”. Nevertheless, he also emphasised the uncertainty of the economic outlook. And he made a clear distinction between economic conditions in the US and euro area, noting “declining real incomes and falling real wages, and a big supply component to inflation” this side of the Atlantic, which “means that the scale of monetary policy tightening needed to adjust inflation to target is smaller in the euro area than in the US”. He also insisted that the ECB would continue to take a data-dependant, meeting-by-meeting approach. And he also suggested that it would maintain “flexibility in both directions, to make sure policy is adjusted in a timely manner, rather than a fixed view of the world for too long”. So, if the inflation outlook cools, Lane would seem likely to be keen to pivot. Overall, a balanced assessment of economic conditions in the euro area.

US Empire Manufacturing survey due today
Another relatively quiet day for US economic releases, with the New York Fed’s Empire Manufacturing survey for January due. The headline gauge of manufacturers is expected to be consistent with ongoing contraction in activity at the start of the year, albeit at a softer pace than at the end of last year, while the measure of price expectations for the coming six months will also be watched having ticked slightly higher in December.