Eurozone inflation rises to 2.9%
Inflation in the eurozone has risen again and could go higher in the coming months, which makes early interest rate cuts from the European Central Bank less likely.
Inflation across the 20-nation bloc rose to 2.9% in December from November’s two-year low of 2.4% because of a reduction of government subsidies on gas, electricity and food.
The data are in line with the ECB’s expectation that inflation bottomed out in November. The central bank is projecting that price growth will range between 2.5% and 3% through 2024, well above its 2% target, before slowing again next year.
However, underlying inflation – price growth excluding food and energy which tend to be volatile – eased to 3.4% from 3.6%.
The ECB, which next meets on 25 January to discuss monetary policy, pushed back against investor expectations of imminent rate cuts last month. It wants to see wage pressures cool first to ensure infation is on track to fall back to its target.
Key events
UK’s construction sector decline eases
The downturn in the UK’s construction sector eased last month to the slowest rate of decline since September, according to a survey.
A sustained slump in house building was the main factor holding back construction output, which firms linked to elevated interest rates and subdued confidence among clients.
The headline purchasing managers’ index, which tracks changes in industry activity, rose to 46.8 in December from 45.5 in November. Any reading below 50 indicates contraction.
Improving supply conditions meant delivery times for construction items shortened for the tenth month in a row. Price discounting among suppliers contributed to a moderate fall in average cost burdens across the construction sector at the end of 2023.
Tim Moore, economics director at S&P Global Market Intelligence, which compiles the survey said:
Construction companies experienced another fall in business activity at the end of 2023 as weak order books meant a lack of new work to replace completed projects. House building was the worst-performing area of construction activity, but even in this segment there were signs that the downturn has started to ease. “
Elevated borrowing costs and a subsequent slump in market confidence were the main factors leading to falling sales volumes across the construction sector in the second half of 2023. Survey respondents also continued to cite worries about the broader UK economic outlook, especially in relation to prospects for commercial construction.
However, expectations of falling interest rates during the months ahead appear to have supported confidence levels among construction companies. December data indicated that 41% of construction firms predict a rise in business activity over the course of 2024, while only 17% forecast a decline. This contrasted with negative sentiment overall at the same time a year earlier.
Industry expert Noble Francis tweeted:
The December uptick in eurozone inflation will prove temporary, says Nicola Nobile, chief Italy economist at Oxford Economics.
As anticipated by yesterday’s national numbers, eurozone inflation rate increased in December. But this was mainly driven by the energy component. German energy inflation, up to 4% was the main culprit as energy inflation was impacted by a strong base effect from the one-off gas price break in December 2022.
Apart from energy, all the other components continued their disinflationary trend. Although some of the components, such as food remain elevated and subject to some volatility, the disinflation dynamic is still quite clear. Food inflation (which also includes alcohol and tobacco) was at 6.1% in December, down from around 10% in the summer. Moreover, the second monthly increase in unprocessed foods inflation was very likely driven by unfavourable weather conditions and hence should soon readjust downwards.
Core inflation dropped to 3.4%, from 3.6% in November, driven by a decrease in non-energy industrial goods inflation. Services inflation remained at 4% over the year, but also in this area the monthly dynamic offers some optimism. The 0.7% m/m increase in services inflation is a touch lower than the 2010-2019 average December monthly increase…
Overall, apart from the monthly volatility, this was another encouraging inflation report and further confirms that a quick disinflationary process is underway. But today’s print will not offer any major insights on the ECB easing cycle. We expect that the January inflation print will be much more informative, as large price adjustments typically happen at the start of the year, with this year’s January print also impacted by the end of the energy-related fiscal measures in some countries. We will follow up on this specifically in forthcoming research.
Bert Colijn, senior eurozone economist at ING, said:
The increase in headline inflation was mainly driven by energy base effects in Germany. The core inflation rate dropped from 3.6 to 3.4%, indicating that the underlying trend in inflation remains relatively benign for the moment. Food inflation also continued to trend down rapidly.
Inflationary pressures made way for disinflation over the course of 2023 as demand weakened and supply shocks faded. This has brought inflation down more than expected at the start of last year. Currently though, base effects from easing supply shocks are moderating and some new inflationary concerns are surfacing. Think of the increased supply chain concerns related to the Red Sea. Besides that, German government measures are also adding to inflation for 2024. The European Central Bank’s mantra has always been that the last leg is the hardest. Is this what we are currently witnessing?
Don’t overestimate the inflationary pressures for now though. Demand remains weak, which is a very important disinflationary driver right now. Also, inventories are high, making current supply chain concerns much less inflationary than the ones from 2021. And even though energy price shocks related to the Middle East are a clear risk to the outlook, oil prices are currently still below US$80 per barrel. So overall, the outlook for inflation continues to be quite benign and we expect eurozone inflation to be around 2% again by the end of the year.
And what does this mean for interest rates?
Current inflationary developments therefore seem to support our view that recent market expectations of a first-quarter hike are premature, but don’t think that we’re back to ‘higher for longer’ either. We expect the ECB to start cautiously cutting rates from June onwards, with 75bp in total for 2024.
NatWest boss: Not ‘that difficult’ for people to buy a house
Sir Howard Davies, chair of NatWest Group, has caused a bit of a stir with his comments this morning that it’s not “that difficult” for people to get on the housing ladder.
He said on BBC radio 4’s Today programme:
I don’t think it’s that difficult at the moment (to buy a house). You have to save, and that’s the way it always used to be…
But what we saw in the financial crisis was the risk of having people being able to borrow 100% In order to get onto the property ladder and then suffering severe falls in the equity value of their houses and having to leave and having a bad credit record etc. So there were dangers in very, very easy access to mortgage credit.
So I totally recognise that there are people who find it very difficult to start the process. They will have to save more. But that is, I think, inherent in the change in the financial system, as a result of the mistakes that were made in the last global financial crisis and we have to accept we’re still living with that.
Electric car sales in UK flatline, prompting calls for VAT cut
The number of new cars registered in the UK has jumped by nearly 18% but electric vehicle demand is flatlining, prompting the industry to call for a VAT cut to stimulate sales.
Annual figures released by the Society of Motor Manufacturers and Traders (SMMT) on Friday show 1.9m new cars were registered last year, well up on the previous year’s figure of 1.6m and the highest level since the 2.3m registrations of 2019.
The increase is a boost for the automotive industry after the pandemic led to supply chain problems and a shortage of vital computer chips that slowed production.
Across the year, 315,000 new battery electric vehicles were sold. That was 50,000 more than 2022, but the number being bought as a share of total registrations failed to grow as expected. They represented just 16.5% of the total, slightly down on last year’s 16.6%.
Eurozone inflation rises to 2.9%
Inflation in the eurozone has risen again and could go higher in the coming months, which makes early interest rate cuts from the European Central Bank less likely.
Inflation across the 20-nation bloc rose to 2.9% in December from November’s two-year low of 2.4% because of a reduction of government subsidies on gas, electricity and food.
The data are in line with the ECB’s expectation that inflation bottomed out in November. The central bank is projecting that price growth will range between 2.5% and 3% through 2024, well above its 2% target, before slowing again next year.
However, underlying inflation – price growth excluding food and energy which tend to be volatile – eased to 3.4% from 3.6%.
The ECB, which next meets on 25 January to discuss monetary policy, pushed back against investor expectations of imminent rate cuts last month. It wants to see wage pressures cool first to ensure infation is on track to fall back to its target.
Neil Wilson, chief market analyst at Finalto Financial Services, said:
European stock markets slipped in early trading, pushing the main indices firmly into the red in the first week of trading in 2024 as the data paints a picture of weakening economic activity and higher inflation.
Weak PMI data for the euro area was confirmed, whilst German consumer inflation surged higher as energy subsidies faded. German’s inflation hit 3.8% in December, up from 2.3% in Nov. Final inflation data for the Eurozone as a whole is due at 10am, expected up to 3.0% from 2.4%.
Meanwhile FOMC minutes earlier this week suggested the Fed is not quite so close to cutting rates; the US 10-year Treasury yield broke above 4%, helping the dollar hit its highest since the middle of December and keeping the pressure on risk assets.
Shares in London, Frankfurt and Paris all retreated on Friday morning, with the US jobs report in focus. The Nasdaq notched its fifth straight daily decline on Thursday, whilst the S&P 500 dropped for a fourth session in a row with Apple suffering again on another downgrade. For the week, the FTSE 100 is off about three-quarters of a percent, held up relative to peers with oil firmer, whilst the Dax is down 1.4% and CAC is 2% lower with luxury taking a bit of a bashing on China fears.
Stocks fall; crude oil prices rise over 1%
On the financial markets, stocks are falling while crude oil prices have risen more than 1% amid tensions in the Middle East.
Brent crude futures are up 87 cents at $78.46 a barrel while US light crude is 97 cents ahead at $73.16 a barrel. US secretary of state Antony Blinken is heading to the Middle East for a week of diplomacy to try and prevent the Israel-Gaza conflict from widening. You can read more here:
Attacks by Iran-backed Houthi rebels from Yemen on commercial ships in the Red Sea have also triggered supply concerns.
On the stock markets , the FTSE 100 index has fallen nearly 67 points, or 0.9%, to 7,656, as optimism about interest rate cuts fades.
Germany’s Dax is down 105 points, or 0.6%, at 16,513 while France’s CAC has lost 66 points, a 0.9% drop to 7,384. Italy’s FTSE MiB has shed 184 points, or 0.6%, to 30,221.
NatWest chair: Likely we will see slow reduction in interest rates
Sir Howard Davies, who chairs NatWest, has warned that we we could see a “rather slow reduction in interest rates” this year because “wage expectations are quite high”.
Speaking on radio 4’s Today programme, he explained why lenders have already started to cut mortgage rates in a fierce price war. As financial markets are now expecting a series of rate cuts from the Bank of England this year,
therefore you can, as a bank, fix your interest rate at a slightly lower level than you could even a couple of months ago. And it’s that fixing of the rates in the market that determines what we can offer to customers. So the market expectations of rates are falling, therefore, we can pass that on to people who want a new mortgage.
He said because the Bank of England was criticised for being slow to raise interest rates when inflation shot up mainly due to higher energy and food prices, policymakers will be careful when they reduce borrowing costs.
Even at the last meeting in December, three of the nine members of the (rate-setting) committee still voted for a further increase in rates. So they’re quite a long way away at the moment from a majority in favour of a reduction in rates. And there is a risk of that, having been burned once by reacting too slowly. They are now going to be rather cautious in coming down.
It’s likely that we will see a rather slow reduction in rates during the year. They will of course be influenced by what is going on in retail prices, not rising anything like as rapidly as they were, but still wage expectations are quite high and that if you read the recent speeches from the Bank of England, thats what’s worrying them the most.
Here’s a lookahead to what 2024 might bring in the housing market:
The EY Item Club forecasting group said the 1.1% month-on-month rise in the Halifax measure of house prices in December capped off a year when values proved much more resilient than forecasters had expected.
An average of the Halifax and Nationwide measures was down 1.5% in the fourth quarter on a year earlier, in contrast to consensus predictions last January of a fall of 6.5%.
Martin Beck, chief economic adviser to the group, said:
Two factors have led to a modest correction. Firstly, unemployment has remained low. Secondly, the rise in mortgage interest rates has been much more protracted than in the past, reflecting a shift in the mortgage stock from variable to fixed rate. Both factors have kept forced sales down and limited supply.
The closing months of 2023 saw a recovery in demand for properties, albeit from a low level. Mortgage approvals in December rose to a six-month high. This was probably aided by falling mortgage rates, as investors have priced in a substantial series of rate cuts by the Bank of England this year.
The EY Item Club thinks this recovery should continue as mortgage rates continue to drift down and lower inflation makes for a likely more predictable macroeconomic outlook. The fact that the ratio of house prices to average earnings is down by over a tenth since the 2022 peak, reflecting a fall in prices alongside strong growth in wages, should also support demand.
This can cause a lot of stress and sleepless nights. My colleague Jedidajah Otte has talked to homeowners who fear a sharp rise in mortgage payments as they come off fixed-rate deals this year.
However, mortgage costs are still much higher than they have been in recent years after the Bank of England raised interest rates to 5.25% to fight stubbornly high inflation. (Financial markets expect it to cut rates to below 4% by the end of the year.)
As a result, homeowners are facing a £19bn increase in mortgage costs as millions more fixed-rate deals expire and borrowers are forced to renegotiate their home loans after the toughest round of interest rate increases in decades, writes our economics correspondent Richard Partington.
Despite an escalating price war between lenders cutting the cost of remortgaging in recent days, economists at the US investment bank Goldman Sachs said many UK households would still experience a dramatic leap in repayments compared with the deals they were leaving behind.
In what has been described as a Tory mortgage timebomb by Rishi Sunak’s critics, just over 1.5m households are expected to reach the end of cheaper deals in 2024 – with an increase in annual housing costs of about £1,800 for the typical family, according to the Resolution Foundation thinktank.
As fixed-rate deals expire and households absorb the biggest hit to their finances in the postwar age, with inflation and tax rises taking their toll on spending power, borrowers are turning to a range of measures to cope with the increased costs, from renting out rooms in their homes to drawing down pensions early and even postponing having children.
Anthony Codling, housing analyst at RBC Capital markets, said:
The demise of the UK housing market is somewhat over reported. The Halifax reported today that house prices rose by 1.7% in 2023, an increase of £4,800. Most, including us, thought house prices would fall during 2023, and most think they will fall in 2024, but not us.
With rising wages, falling inflation, falling mortgage rates, and increasing talk of election related housing stimulus packages we expect house prices to rise in 2024. Our pessimism was misplaced in 2023, and we don’t want to make the same mistake twice.
Introduction: UK house prices rise for third month amid property shortage
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
House prices in the UK rose for the third consecutive month in December, reflecting a shortage of properties on the market, according to mortgage lender Halifax. It added that with mortgage rates easing, confidence among buyers may improve in the coming months.
The cost of an average home rose by 1.1% to £287,105, just over £3,000 more than in November and the highest level since March, Halifax said. This comes after monthly gains of 0.6% and 1.2% in November and October.
Compared with December 2022, values were up 1.7%, the first annual growth in eight months, following a 0.8% drop in November.
Kim Kinnaird, director of Halifax Mortgages, said:
The housing market beat expectations in 2023 and grew by 1.7% on an annual basis. The average property price is now £4,800 higher than it was in December 2022. Whilst it’s encouraging that we saw growth in the last three months of the year, this was preceded with property price falls for six consecutive months between April and September.
The growth we have seen is likely being driven by a shortage of properties on the market, rather than the strength of buyer demand. That said, with mortgage rates continuing to ease, we may see an increase in confidence from buyers over the coming months.
Across all the UK regions, Northern Ireland recorded the strongest house price growth in 2023, as properties increased in value by 4.1% to £192,153. Scotland saw property prices increase by 2.6% to £205,170. At the other end of the scale, the south east fell most sharply, houses there now average £376,804, a drop of £17,755 or 4.5%.
Halifax expects prices to fall by between 2% and 4% this year as many still struggle to afford the sharply higher mortgage costs compared with recent years following a series of Bank of England rate hikes. The question is when will the central bank start cutting rates? Financial markets are betting that the first reduction will come by May.
Kinnaird explained:
As we move through 2024, the UK property market will continue to reflect the wider economic uncertainty and buyers and sellers are likely to be naturally cautious when considering making a move. While wage growth is now above inflation, helping to ease cost of living pressures for some and improving housing affordability, interest rates are likely to remain elevated for as long as inflation remains markedly above the Bank of England’s target.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said:
The housing market saw a remarkably strong finish to the year, as buyer and seller confidence was boosted by three consecutive interest rate holds and the growing belief that the next move in rates will be downwards.
Increased competitiveness among lenders leads to lower mortgage rates and we find ourselves in the midst of a price war. With HSBC launching the headline-grabbing 3.94% five-year fix and reductions from Halifax, NatWest, TSB and other lenders, the gloves really are off.
With 2023 being a disappointing year in terms of amount of business done, lenders are keen to get this year off to a cracking start. Increased competition, rates aside, may also lead to lenders broadening criteria to attract business with longer mortgage terms or greater flexibility to allow certain variable incomes. Although those remortgaging this year will still see an increase in their payments, the pain will not be as bad as it could have been.
Later today we will get the US non-farm payrolls report for December, which is expected to show that the economy added 150,00 jobs following November’s 199,000 increase.
The Agenda
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9.30am GMT: S&P Global/CIPS Construction PMI for December
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10am GMT: Eurozone inflation for December (forecast: 2.9%)
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1.30pm GMT: US Non-farm payrolls jobs report for December (forecast: 150,000)