17 Nov 2023
Jonathan Platt, Head of Fixed Income
Richard Platt was born around 1670 in Warrington. He was my great (a few times) grandfather. Through looking at county records I have found out that he was a spade maker.
More recent information about my ancestors has come from census data. Under the 1800 Population Act, Britain established a count of people every 10 years, adding more details as it went along. It is now mooted that the census will be discontinued: in my view this would be a mistake. Statistics are important for policy making; the current labour market data farce is a good reminder that we need reliable information. The census remains an important source of demographic data.
Over the last 150 years the UK’s population has doubled and is likely to reach 70m fairly soon. There are several trends evident. The growth rate is slowing, and the fertility rate in England and Wales is now around 1.55. This points to a potential population contraction, not expansion, as there are not enough babies being born – a common theme across swathes of Europe. The age profile is also interesting. Looking at 2021 there were about 932,000 people who were aged 56, the most of any age in this year. What we are seeing is the tail end of the baby boom moving towards retirement. This has significant implications. Spending on health and care will rise materially above inflation, pension payments will increase, and sources of tax will need to change.
Migration can provide the offset and is the reason for the expected population growth, as it has been for the last 30 years. The debate about migration has to weigh a range of factors – but younger workers will be needed to support growth and ultimately, services, unless an AI miracle is around the corner. I think we need a Ministry for Demographics – certainly more than we require a Ministry for Culture and Media.
On the data front the UK growth for Q3 came in a touch better than consensus – at zero. Consumer spending and business investment both fell, offset by a positive contribution from net trade. This was primarily due to a fall in imports, which itself reflects weakness in domestic demand. Construction activity showed a rebound in September, reflecting the better weather. Forward looking indicators are consistent with falling private sector output but the economy’s resilience in the face of monetary policy tightening continues to surprise. On the inflation front, the GDP deflator showed that it is domestic inflation that is the problem, with imported inflation slowing down sharply. In big picture terms, the UK does not look too different from the euro area. The main news there centred on the Iberian Peninsula: the resignation of the Portuguese Prime Minister, with a general election being called, and ongoing political uncertainty in Spain marred by an attempted assassination of a leading politician. Despite the turmoil both bond markets reacted calm. Indeed, spreads to German government bonds do not indicate any stresses in the euro area, with Italy consolidating at just under 190bps, after nudging towards 210 in October.
US treasury yields drifted higher, finishing above 4.6% despite moving below 4.5% intra week. In the UK there was also a modest move up, with the 10-year rate settling above 4.3% whilst in Germany the equivalent yield ended at 2.7%. Real yields mirrored these moves with little change in implied inflation. However, US survey evidence pointed to a pick-up in consumers’ inflation expectations, with longer-term US inflation expectations rising to a 15-year high of 3.2%, well above the Federal Reserve’s target. This will be a concern to policy setters but was mitigated by a fall in US consumer confidence, with the reading hitting an 11-month low.
Credit spreads consolidated their recent tightening, with sterling investment grade indices steady at 1.3%. Similarly, high yield markets were well behaved with little movement over the week. There was a surprise profit’s warning from Diageo, the world’s leading spirits company, who pointed to weakness in Latin America and some push back on premium products. Is this a sign of things ahead or just a pause ahead of Christmas festivities?
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