Is the UK Economy on Brink of Stagnation?

The UK economy is on the brink of stagnation, Piers. That was the subject line of the email I had from The Telegraph hit my inbox this morning, Friday the 28th of March. So getting a lot of this actually, just canvassing some content for this conversation, this episode, a lot of doom and gloom. And I guess this is always quite typical post-budget, which was a big dominant kind of headline we had midweek. So what I wanted to do in this episode is talk about this. True or false, is the UK on the brink as the media would like to position the kind of sensational negativity around that? Because we've had a couple things, not just the budget, we've had some UK inflation data, CPI earlier this week, and we've just had hot off the press UK retail sales. So just wanted to kind of unpick a lot of these things that have happened in the past 4 or 5 days and kind of conclude on should people be worried? Or is this just a little bit of, you know, talking up what otherwise is a little bit more to it situation? So where do you want to begin?

Well, it feels like the UK has been kind of on the brink of disaster for years. I don't know. Is that just the media that tends to have that kind of, I don't know, for whatever reason, the media's just optimistic.

I think we're our own worst enemy. We love to talk ourselves down. It's that classic.

Yeah. I mean, Look, it hasn't been amazing in the UK. I mean, we'll talk about data and stuff and from a growth perspective, it's been underwhelming would be an understatement when you are comparing it to our big brother across the other side of the Atlantic, which for the last few years has been on fire. So that's the problem for the UK. It's like, why aren't we growing as fast as they are? Because obviously we've got similar, you know, I was going to say similar economies, but maybe that's not quite true, but similar in the sense of, you know, very mature Western economy, you know, wealthy economy from a kind of household income GDP per capita perspective. You know, it's all very similar. So yeah, I think we've been stuck in a little bit of malaise. I think the, you know, the kind of psychology of the nation as a whole, shaped by the media, by the way. We've just been feeling a bit sorry for ourselves and kind of stuck in the mud a bit, but we've been perennially on the brink of disaster, but the disaster hasn't come, right? And so let's dive in. I mean, I think that, well, where to start? I mean, maybe we could start at the latest piece of information, which was this morning. Let's just go straight into the good stuff and reasons why we are not on the brink of disaster. And actually, maybe this is the beginning of some green shoots, as we say, right? So what happened this morning? We had retail sales data announced, right? For the month of February, and it was really surprisingly good. And the data came in at 1%, so that's plus 1% increase in retail sales. We were expecting a decline of -0.4%. Now, what's so obviously just that month, really good, much better than expected. But the key is it's off the back of a really good January as well. And the January figure was even better. I think that was 1.4% growth in January, right? Now, this is really key. Back to back, you know, big retail sales growths. Back to back doesn't happen. I mean, the last retail sales data, particularly in the UK, is actually quite choppy. The normal pattern of things is you get a month of growth and then the next month is a decline, right? And it's positive, negative, positive, negative. To evidence that, the last time we had back to back months was last summer. And really, if you take these two months in a row, the last time we had back to back months this good, as in 2 months in a row of 1% or better, you've gotta go back to 2021, right? So it's like, okay, well that's kind of a bit, it doesn't quite fit the narrative that maybe the media is spinning and you kind of gotta go back to 2024 here. 'Cause look, I don't know, people listening to this who live in the UK, I mean, how do you feel? I mean, what's your, what is your spending habits looking like? Are you actually going out and spending more money or not. Well, on average, I can tell you that household goods stores are having a great time of it. Retail sales in household goods items was up 7%. There's other categories like non-store retail was up 4%, other non-food stores was up 4%, textiles and clothing had a really good month. Food stores, basically food was the only bad thing in here. So like supermarkets actually declined 2%. I don't know whether the problem with this data, right? It's like pound sterling amount. So are we seeing food prices drop in supermarkets? Is the volume of food still the same but prices are cheaper? So net, net, the retail sales figure's negative. We can't quite see in this data, but without delving into too much of the detail, look, it's a really good back-to-back month. So why are we getting 2 months in a row of strong creator is the key question.

Yeah. And I think perhaps then that's where you can start to unpick this a little bit, because if I think of people literally making a transaction, that's like the end of a very long process. So presumably they've got a job, presumably they're making more money than they were in terms of, it feels like since COVID everyone's just poorer and we still in that kind of malaise of like prices have remained somewhat elevated, albeit They probably in a lot of places have come down, but seemingly though, what we are seeing at the end of the process that you've described is people are spending money. So I'm assuming what's the job situation? What is the wages situation? What is the disposable income situation then?

Absolutely. So from a wage growth point of view, wage growth has been really strong basically for 12 months now. Now the 12 months prior to that, it was really weak. So I think what's happened from that, almost like a, if you think about it from a behavioral perspective, we had 12 months of really weak, like negative wage rises. Okay. So therefore wages going down, right? Then it flipped and we've had wages going back up. But because of this chop chop and the COVID and the media and people are obviously still worried about the future, the future of the economy, their personal economic future. And so What happened in 2024 is the savings rate climbed and climbed and climbed and climbed, and actually it hit 12% last year. Now that's the percentage of your income that you save. And to put that in context, I mean, does that, is that a lot? Is it not? 12% is the highest ever savings rate outside of the freak COVID period. So last year, We started to earn more money. We're still worried that things aren't looking great. Obviously in 2024 in the UK, there was a lot of political, you know, upheaval. Obviously we had a general election, Labour came in, we had a budget at the end of, in October, which I would say didn't really go down particularly well. And so I think there's been a lot of change and that brings uncertainty. And then given that we had a bad 24 months before for wage growth, people were just cautious. Now what we're seeing here, we hit 2025, two really positive retail sales growth months in a row. Is this the moment where you're cracking your wallet back out and that savings that you've been building up last year, it's like, wow, okay, I've got a decent amount of wedge in my savings account here. Maybe I will go and buy that new pair of sneakers that I saw you wearing in the office on Wednesday, Anthony.

Wow. The sneakers have made an appearance in this episode and having just recorded with Steven, they're going to make another appearance. It seems like I made an impact on the office. But an interesting statistic that I saw then was, you know, people, and particularly the media, as you said, which drives a lot of the psychology behind consumer spending in a country, And you kind of had that period. It's almost the opposite, right, of what we've had where everyone in the UK was quite depressed in the previous 12 months. But in America, it was like compounding the depression was America's so great, they're growing gangbusters. And it's like, what, how is America gunning at such a rate? And I just saw an interesting stat about the US consumer against the UK consumer. So I wonder if you could explain that a bit.

Right. Well, this is it, right on that kind of that topic of savings rates. Well, if you look at, I'm looking at a chart, it's a great chart from Bloomberg, I think, isn't it actually? Where they're just kind of tracking back to 2019. They're tracking every quarter what's the savings rate in the UK versus what's the savings rate in the US. What's really interesting is pre-COVID, the savings rate here in the UK was lower than in the US. And of course then if you think economically, right, obviously if the savings rate's lower, we're spending more. So from a consumption point of view, that's positive and it should drive, you know, more accelerated growth, right? So pre-COVID, we had a lower savings rate. Ever since COVID every single quarter without fail, and look, we're talking 5 years now, that every single quarter the savings rate here in the UK has been higher than the US and What's really been notable is the last, and it's not surprising, it's the last 3 years. I say it's not surprising, back to that point about the divergence in the performance of the 2 economies. US has just been phenomenal, right? 2023, 2024, particularly phenomenally resilient growth in the face of high inflation, interest rates still super high, and yet it was still on fire. And that's because the US savings rate never went above 5%. And it started to drop. It's actually now about 3% versus the UK's 12%. And that divergence has— the divergence in the savings rates has been growing and growing and growing and growing really since 2022. And that's a really powerful, I would say, catalyst towards that divergence in the economic performance as well. And if you think about the amount of money getting spent, then in the US right now, there's 15% more cash getting spent. Obviously there's wage growth, there's inflation, so stuff's getting more expensive. People are earning more year on year, right? So you'd naturally expect more cash. I mean, that's economic growth, right? GDP growing is the volume of transactions increasing. So you'd expect it to be going up, but since pre-COVID, it's now 15% higher, the amount of cash getting spent in the US versus the UK. 2%.

All we need is, all we need is some good weather, Piers.

Yeah. Well, that's not going to happen, is it?

So, uh, if you're hanging your hat on a, yeah, a warm Easter weekend to celebrate, you know, a few extra days off either side of a weekend, I can't promise you that.

But, uh, although, well, here's a forward-looking indicator for you because I have been Tracking the weather in the US versus the weather in the UK, just because I happen to be going to New York tomorrow. So I'm in New York next week, so I'm looking at the weather. The weather's way better here in London than it is in New York next week, which is obviously a bit annoying. But yeah, maybe this is the turning point.

All right, so look, we've ticked retail sales off, so probably then a little bit of positive there. So how about we go to sticking with data, the inflation. And I thought this was interesting because the way it was kind of spun, because it came out a few hours before the budget came out earlier this week, and it was kind of like the Chancellor catches a break ahead of the budget announcement. And this was all because UK inflation unexpectedly cooled and it did push along a little bit the market pricing around potential rate cuts. To come from the Bank of England in May. However, I know that there's more than meets the eye with this one. So what are you thinking?

Yeah, I mean, look, it, I mean, cooled is a, you know, that's a generous word. It was lower than expected. So the headline inflation number for February was 2.8%. We had expected 2.9%. There's nothing really, nothing really in this, in my opinion. It's like, well, it's still really high and anyway, it doesn't matter because the thing about inflation in the UK and another reason why we're a bit doom and gloom, or the media is at least, is because we're expecting inflation to trend higher throughout the whole, well, at least until the autumn this year. Analysts are expecting, including the Bank of England's own analysts and the ONS, they're all expecting inflation to trend higher to about 3.7% by the autumn. It's 2.8% now. And the reasoning behind that is because of things like energy prices. So we're getting the energy price cap. So the regulator here in the UK controls an energy price cap, you know, above which, you know, utility providers can't charge your customer, right? But they're raising that cap. So this is obviously the, the utility companies are going to increase the price. And so energy costs are going up, water bills are expected to increase. We're also expecting food price inflation to kind of come back a little bit after being soft. So this is feeding into a narrative where the Bank of England's own inflation forecast is a rise to 3.7% by September.

It's such a good lesson on how to interpret information. Because if you were to read the news this week, there is absolutely no forward-looking mention about already the pretty clear visibility we have because this isn't like, oh, I think inflation's going to go up. If we look at that energy component, that's a guarantee that's going up. Yeah.

Yeah.

So that's right. But yeah, so interesting.

I mean, so you think about the Bank of England. Well, I, I think about the Bank of England next, I should say, when it's like, okay, well, if that's the inflation trend, how's the Bank of England going to manage this? Because just as a reminder, right, the Bank of England have been cutting interest rates. We've had 3 quarter-point cuts, right, since the 2024 peak, right? And they started cutting in the summer and basically they're on a run rate of cutting by a quarter point every two meetings. We've just had a meeting a week or so back where they did not cut. That was expected because they cut the meeting before. We talked, we touched a little bit on this last week where the vote split was 8-1. So 8 people on the committee voted to keep rates unchanged. One person voted to cut. Okay. And that was a bit hawkish because 2 people had voted to cut before. And anyway, look, the Bank of England— is this those green shoots I mentioned, those retail sales figures that look really promising? Is this the beginning of something really cool and the UK economy's going to pick up? Well, do interest rates continue to go down is a really key component of giving the consumer confidence to carry on with this positive momentum. So the big conundrum is, can the Bank of England continue to cut when we're expecting inflation to trend up almost 1% higher over the next 6 months? And so either the forecasts are going to be wrong and look, what's— it's also talk about uncertainty. Obviously Trump and tariffs, we're going to find out more about that next week, 2nd of April. Right.

Can I just ask on that point of Trump's and tariffs, I'm glad you flagged that because looking at the countries in terms of do they run a deficit? With the US as a trade partner to try and like understand who is it that the US are more angry with in a more simple way than who not. Is the UK a little bit out of that firing line to that respect?

I think of all the nations on the entire planet, give or take, you know, the UK is definitely right up there as in, you know, less risk, less at risk to Trump tariffs than most. And look, We've got, obviously got a good relationship with the US historically as well. But when Trump just tweets, look, 25% tariffs on all cars coming into the US, that includes the UK, right? And we do send cars there. I mean, it's not a huge volume, but still there is risk. I mean, there's definitely not zero Trump tariff risk for the UK, but it's a lower risk than most. But right, that's inflationary. And so look, and that might be dampening for exports and the economy, right? And so it's just another thing to add into the mix when you're trying to figure out what's going to happen over the next 6 months. And either those inflation forecasts are wrong. Oh, look, here you go to core inflation. All right. Now we know energy prices are going to go up. Fine. What about core inflation and where's that going to move? But in, at the end of the day, Everyone has to pay their utility bill and it's going to be more expensive, meaning they're going to have less disposable income to spend on the high street. So are they going to be willing to dig even more into those savings that they built up last year? Yes, my gas bill's more, but I'm still going to go out and spend more on my new pair of sneakers as well. Right. Is that going to happen or not? And I think that's the million-dollar question.

You'll hear in the next Deal Room episode that those Nikes were on a bargain rate. So I definitely am savings conscious even though I'm spending.

But well, a bit like the Nike share price though. That's had a shocker.

Do you know what? I'm all in picking up some bargains at Sports Direct on Nike at the moment. All over it. I was even I was even, I saw Adidas Yeezys, you know, those really weird and wonderful Kanye style shoes. They are trying to flog those off at 40 quid a piece. And do you know who I took a photo and sent it to? To Milan, who's our head of software engineering, who flips trainers. Even though he was in New York, he and I were messaging. And, uh, he was getting— we were doing photos of all these trainers. But yeah, so slight tangent, but we, we couldn't—

you guys.

Yeah. Well, you know, you've got to hustle, make a side hustle in this economy.

How much were those, those Kanye sneakers worth, like when they first launched? Talking a couple hundred, right?

£240.

Yeah. Wow. And they're down to £40 now.

Yeah. Can't get rid of them now.

Yeah. Amazing.

But yeah, I mean, you, we, we, we basically looked and we could basically flip them for a tenner each. And it was like, it's not worth the hassle.

But yeah, you're going to have to do a lot of volume there for that to be in any way interesting.

Well, there you go. Even in high finance, we're all hustling out there. So it says a lot about the UK economy. But let's talk about the budget. And I remember, yeah, you know, my, the first 10 years of my career sitting as an analyst on the desk and preparing traders like yourselves for Budget Day. And I always used to hate Budget Day because not only do you get stung with an extra pence on your pint or something like that, but it was just so, just a boring event to cover.

Oh, so dull.

Very different to, I think if you're thinking about a career and going into markets, whether it's be a trader, an analyst, strategist, whatever it might be, there's kind of a lot of upfront legwork that goes in ahead of these things. But it's so long-termist in terms of from a reaction function on an intraday. The only really sexy part comes right at the end. So they give this speech and you take bets on the floor of how long is the Chancellor going to speak for on like the statement or the budget, and it'll be 42 minutes, 47 minutes. That was about the most interesting part. You get a bit of cash on the side, again, hustling. But then they would drop the DMO. So the Debt Management Office would drop the gilt issuance, and that was when you guys in fixed income were trading that. Yeah. Budget takeaways other than the, which I know that the, yeah, obviously gilts and yields moved quite a lot on the DMO announcement.

Yeah. I mean, I think for me it was, I was looking at stuff like the ONS, so the Office of National Statistics in the run-up to this, basically looking at how much fiscal headroom has Reeves, the Chancellor, got. And basically they slashed the fiscal headroom for 2025, mainly because they halved their GDP growth forecast for the year. So they had marked up a 2% growth rate for this year, which for the UK, by the way, is very strong. Like that would be the best since pre-COVID kind of stuff, right? And so, except that now they've taken that 2% and they've gone, nope, we now think it's going to be 1%. And so of course, from a government revenue perspective, that's bad news because a lot of their revenue comes from tax receipts, right? And you are taxing sales, VAT, you're taxing corporate profits and you're taxing salaries and all this kind of stuff, right? And so if growth is going to be slower, all of these tax revenues will reduce. And so ultimately that's less money into the government coffers, which means that the government have less money to spend. On the budget that their plan of spending is laid out, right? It's just, right, how are you going to afford that? Obviously a function of that is growth, but then the other side of that is, well, okay, depending on how much we're going to have coming in, that will then determine how much we need to borrow. And so that's why the bond markets really start to ping around off this stuff as you're starting to get a clearer idea on future supply of government issuance. Yeah.

And I saw that gilts actually had their, one of the best days of the year. So a smaller than expected slate of bond sales for the upcoming fiscal year. So maybe you could explain that mechanics, but then also what I read was with issuance skewed away from longer-dated securities.

Yeah.

So what are they talking about here?

Well, so if you're borrowing money as a government to fund your deficit, and to fund that spending plan that you've got, then you are gonna borrow that over different durations. So you can issue bonds as a government. That's how you borrow money. And you can issue different duration bonds. So you could, like the one most people look at in terms of looking at yields and charting and stuff is like the 10-year. The 10-year government bond is like your benchmark kind of yield and bond price. Okay. But you can, so that's borrowing money for 10 years obviously, but you can issue 7-year gilts, 5-year gilts, 2-year gilts, 12 months. You know, less, you can even go down to like 3 months if you want, right? And, or you can go longer, you can go 30 years, for example, right? So the idea is the government kind of picks and chooses their durations to kind of think, you know, to kind of spread their debt load and to spread the redemption payments in the future when you've gotta pay these loans back, right? So it's kind of smoothing it all out. But yeah, it seems like the government is preferring to look to borrow on the shorter term, which I agree with for once. And that's because interest rates are expected to come down. So that should drive down yields, right? Which means that, well, let's not borrow a load of money for the long term now at really high rates. I mean, our borrowing needs today, well, why don't we borrow that for a short period and pay those higher rates for a short period? Then when and if, and obviously this is the big if, rates come down, yields come down, fine, we can start to borrow for the longer term further down the line when it's cheaper, right? So it kind of makes sense. And so yeah, in terms of the long end of the curve there, that's people buying because they think the supply of longer duration bonds will be less. So if supply drops, 'cause the government are going to issue less of those durations, if supply drops, well then price goes up. And so that's why that kind of the longer end of the curve prices rose.

Okay. So we started with the question, UK economy on the brink of stagnation. True or false, Piers?

False. Come on. Come on, UK. We can do it. Let's lift the spirit together. We need some kind of major sporting event to go well for us. That tends to be something that kind of gets us fired up. I'm just trying to think though. There's no, No major tournaments. Well, there's, there's, well, there's the Lions Tour, but that's kind of Britain.

Yeah, a bit early for Wimbledon.

Bit early. Ah, yeah. I think, yeah.

I don't, yeah. I don't think Murray's gonna come out of retirement with his metal hip anymore, but okay, cool. Well, look, drop us a comment and, um, having now heard some of the evidence, if you're watching this on YouTube, if you're on Spotify, I know you can leave a comment. So let us know what you think. Look, Don't have to agree. Love to hear if you disagree, just what is your rationale? We'd love to see. All right, Piers, thanks very much for that. And everyone have a great weekend. Cheers.

Have a good weekend.