Economy in Brief: May 2025

Economic readings continue to ebb and flow as is common. In May, the UK GfK consumer sentiment index has improved to -20 from -23. However, at -20 it's still weaker than it was in March when its value was -19. The 12-month average for GfK sentiment in the UK is -18 leaving today's -20 reading from May still weaker on balance than it's been over the past year. All of this sort of ‘to and fro’ makes it a little bit more difficult to pin down what's happening. However, the chart on the GfK reading shows that the downtrend in consumer sentiment is still in place and with readings that continue to hover around -18 to -20 - good signals still are not being emitted and the trend has not been righted.

The GfK barometer has a 29-percentile ranking data back to 1996. So, this is a bottom 30% standing for the consumer sentiment rating for GfK.

Other economic readings continue to go back and forth just today the German GDP reading was up relatively sharply as US tariffs are being cited for stimulating German activity in the near term as firms tried to export goods before the tariff in the US went into effect. We had previously seen some improvement in the European manufacturing (PMI) indices that we speculated was due to that same sort of lead and lag, behavior surrounding the expected imposition of tariffs. For the UK itself, retail sales have been stronger than expected largely because of better weather. Yes, better sales but not on any fundamental improvement.

Economic readings are always back and forth, and readings are never gospel making it difficult to the central banks to discern trends and even to set policy if they are in a data-dependent mode. But that is nothing new. It may be a bit more of a problem now when so much uncertainty seems to hang in the air with the war in Ukraine unable to be stopped, the US pushing more defense responsibility onto Europe, and the US also brandishing tariffs to try to remake the world in a way it feels will be more fair and friendly for it. Of course, one man’s ‘friendly’ is often another man’s ‘unfriendly.’

The sentiment reading in the UK features strong readings for households’ current financial situation and savings environment…but the current economic situation is only at the 30% mark and, looking ahead, it has a modest 18-percerntile rank. By income groups upper income individual’s sentiment has a 75-percentile standing compared to an abysmal 3.8 percentile standing by lower income individuals.

Inflation over the next 12-months continues to have a high standing at an 86-percentile mark while unemployment prospects (that have diminished very recently) are at a 75-perntiel standing (higher only 25% of the time) and despite recent improvement on this score the unemployment response is still 9 survey points higher over the last 12-months.

The slight improvement in the GFK survey this month is even less than its monthly standard deviation for change. It is a rise, but not significant. The UK economy continues to face a difficult situation with sentiment, seeming to remain under pressure.

S&P flash PMI readings for this selected group of early reporting eight countries continues to show relatively mixed performance across the eight countries in the table. Trends, however, suggest a phenomenon that is largely unexpected because it shows some strengthening in manufacturing against weakening in services. During this period, when US tariffs have been threatened (and counter tariffs mooted as well) - and only recently imposed. We might have expected manufacturing to be doing worse and for the services sector to be relatively steadier. It may simply be too soon for this trend to play out, or, it may be that manufacturing, in fact, has ramped up slightly in the months just before tariffs took effect as manufacturers tried to slip goods across customs portals before the tariff walls went up. In any event, the tariff walls that were threatened were not the ones that went up, and the more modest tariffs were put up in the United States except those imposed against China but even there the tariffs that eventually were set in place for the interim, we're lower than the ones that had initially been threatened.

Data show that on year to year changes, there's been a broad strengthening that has occurred across this 8 country area with 24 sector observations recorded- that is 3 sectors (manufacturing services and a composite) for each country across eight countries. In this mix, there are only 5 sector readings that are weaker on a year over year comparison. However, over six-months compared to 12-months and over three-months compared to six-months the weakening dominates with 13 of 24 sectors showing weakening over six-months, and with 14 of 24 weakening over three-months.

The monthly data that are more volatile showed that there is more weakening in March than there was in February by a large factor, as 18 sectors weakened compared to six improving. But, after March, both April and May showed only 11 sectors weakening month-to-month with 13 improving. The monthly data, however, tend to hop around and the current monthly data are still available on only a flash basis and are subject to change.

More fundamentally we can evaluate these sectors by the queue standings of their flash readings. In May this entails ranking the sectors back to January of 2021. On this basis eight of the 24 sectors show standings above their 50th percentile, putting them above their medians for the period. Only 1/3 of the sectors are performing at a better than median level on comparison with data back to 2021, a period that has not been a period of any particular strength. The current median value for the queue standings for the overall (or the comprehensive) index is in and its 40th percentile. That compares to a 52-percentile standing for the manufacturing median and a 35-percentile standing for the services median. So, manufacturing is doing relatively better (relative to its median) and services are doing relatively worse they may have generally since 2021. On this group of countries, the manufacturing PMI has averaged 51.7 on the period compared to services averaging a slightly stronger 52.7. The comprehensive average has been 52.4. These are relatively low performance results for the full period.

This period of course includes the tail end of the COVID period, plus the recovery from COVID and then it includes the period when the Ukraine invasion by Russia began and its ongoing aftermath. And now, in early 2025, it's going to start including the period where the flirtation with tariffs began. We will be on the outlook to see how the tariff negotiations progress and how the imposition of whatever tariffs arise out of this works out. For now, the concerns are that the uncertainty over what will happen with tariffs is going to be adversely affecting activity, and, of course, there are geopolitical shifts, among them Europe becoming more responsible for its own defense which should push more economic activity generally into the European theater.

UK inflation is rising. Whereas weakening oil prices seem to be containing inflation everywhere else, particularly in the European Monetary Union, but also to some extent in the United States, we see in the United Kingdom that headline inflation is on an uptrend, core inflation is on an uptrend, too, not quite as discernible as this, but it's nonetheless on its own uptrend.

Headline inflation for the UK CPI-H measure rose by 0.6% in April after 0.2% in March and in February. The CPI-H version of core excluding food, energy, alcohol, and tobacco rose by 0.4% in April after rising 0.3% in March and 0.2% in February.

Sequential inflation rates show the CPI-H up 4% over 12 months, up at 4.7% pace over 6-months and up 3.9% at an annual rate over 3-months. All of these rates are excessive compared to the Bank of England's 2% target. A year ago, the headline was running at 3.1% year-over-year; conditions have worsened since then even in the face of what have been lower and falling global energy prices.

The sequential trend for the CPI-H core measure shows a gain of 4.3% over 12-months, a 4.6% annual rate rise over 6-months and a 4% annual rate gain over 3-months. The only clear pattern we have from these various periods is that in all of them the inflation rate is excessive; and one year-ago the core year-over-year pace was 4.4%. So, conditions appear as though they may have improved marginally since then, but again I would emphasize that I'm only saying that it appears so, and that the improvement is marginal.

Diffusion calculations show the breadth of acceleration period to period and demonstrate that inflation acceleration has become less common than it was a year ago when headline inflation was up 3.1%. The diffusion of inflation was only 9.1% then, that tells us that the overall inflation rate was 3.1% and that prices were not generally accelerating across most categories only in 9% of them. However, this year the diffusion gauge for the headline that has inflation up to 4% is at 54.5% and then the gauge over 6-months with the inflation rate is 4.7% has diffusion also at 54.5%. And both of those horizons’ inflation is accelerating slightly more than it's decelerating since the diffusion measures are above the neutral value of 50. However, over 3-months when the inflation rate settles down a bit to 3.9% the diffusion measure is only 36.4%, indicating that the breadth of inflation has narrowed and that there is now more deflation than there is inflation over 3-months. That comes from comparing the inflation rates when 3-month inflation was 3.9% to 6-months when it was 4.7%. The slightly improved diffusion gauge is therefore not surprising; however, it's also encouraging that it suggests that the slower inflation rate has more breadth to it and isn't just the result of one or two rogue categories that may have tipped the balance.

At the bottom of the table as a reference we have the unemployment rate as well as the UK claimant rate of unemployment and on these measures we you can see that the economy has been weakening slightly The year ago unemployment rate was 4%, the claimant rate was 4.1% over the last 12-months it moved up to 4.3% with the claimant rate still at 4.1% over 3-months. The unemployment rate is up to 4.4% compared to 4.5%; the claimant rate shows the unemployment rate has been creeping up although there's nothing draconian in train. This is not a happy report for the Bank of England. Inflation is still not under control and while the breadth of inflation may have been cut over three months all of the inflation data suggest that inflation is stubborn and that it has been stubborn and that there's a slightly accelerating trend that is still underway. This is an unfriendly report.