If the phrase “self-fulfilling expectations” is anything to go by, taming inflation will continue to be tough. Businesses are doubtful of the central bank’s messaging on projected inflation. They expect it, and wage growth, to remain elevated. Consumers are growing cautious too. Many households are prioritising debt repayments in the face of high rates. Elsewhere, US job market is still strong but easing, while China’s economic recovery is losing steam.
The podcast that keeps you up to date with what is happening economy-wise in Northern Ireland. Telling you what you need to know but not necessarily what you want to hear. It is better to be prepared for the economic environment we are operating in and not the world we would like to be in.
Featuring Dr Lisa Wilson from Nevin Economic Research Institute
All those thinking that May saw the end of interest rate hikes, think again. With the economy performing better than anticipated, but core and services price inflation remaining stubborn, many now think the Bank of England will be pressed to advance monetary tightening a tad bit more. An economy that has so far remained fairly resilient to higher rates may yet face a sterner test.
It could be said that the global economy at present is characterised by ‘financial hangxiety’. Anyone who has been to a late spring / early summer barbecue and suffered from the after-effects of beer, wine or aperol spritz the next morning, and the dread of the working week that lies ahead, will probably know what hangxiety is. With the financial version, consumers are experiencing the effects of rising food and utility bills and resulting nervousness about the state of their household finances going forward. This is particularly true for those mortgage holders due to see a surge in their mortgage payments in the coming months and years.
We are close to a turning point in monetary policy, but the full weight of rate rises to date have yet to be felt. And it might get worse for households in the near future. Firms have started cutting bonuses. And mortgage payments are going to shoot up. Any good news? The Bank of England is expecting the headline rate of inflation to show the first large drop this week, meaning prices would still be on the up, just not as rapidly as they have over the past year. Locally, another election is over. Back to porridge for the politicians. But back to Stormont?
Whether the Bank of England’s monetary tightening cycle has ended is yet unclear. Sure, the Bank has more upbeat views about the UK’s economic future. But there are still some unknowns. The full impact of high interest rates is yet to be felt. Firms haven’t paused hiring but are making cautious changes in types of staff hired. And while there is still some momentum left in growth, how long would it last?
Today sees the release of April data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – indicated that growth was sustained in the Northern Ireland private sector, with activity up for the third month running. Employment continued to rise markedly as a result. Meanwhile, rates of both input cost and output price inflation softened again and suppliers’ delivery times shortened.
Northern Ireland’s private sector started the second quarter in the same way that it ended the first with businesses in expansion mode. Output, orders and employment all increased in April albeit the pace of growth eased relative to March. This was particularly marked with new orders as falling demand amongst manufacturers and construction firms largely offset growth within retail and services. Manufacturing was the only sector to post a decline in output in April with construction finally recording a rise in activity for the first time in 14 months.
The trend of easing inflationary pressures continued last month with input costs rising at the weakest pace in almost two-and-a-half years. Services firms have recorded the steepest rise in cost pressures in each of the last five months. Despite robust rates of wage inflation, all sectors continued to increase their staffing levels in April. Retailers led the way in the recruitment drive, but construction firms posted a record rise in staffing levels. This would appear to suggest the softer demand in the sector is enabling longstanding vacancies to finally be filled.
Supply chain disruption has blighted the economy since the pandemic first hit. But April’s survey revealed that firms saw supplier delivery times shorten for the first time since the question was introduced back in March 2021.
Overall, the steady improvement in the private sector is in stark contrast with the mounting difficulties within the public sector. Budget cuts and a scaling back of public services will also have implications for parts of the private sector too. Meanwhile the headwinds of higher interest rates and increased taxation will increasingly be felt by all parts of the economy in the year ahead.
The main findings of the April survey were as follows:
Ahead of the Bank of England’s crucial interest rate decision this week, several surveys point to sustained inflationary pressures. Not surprisingly many believe the BoE will be hot on the heels of the Federal Reserve and ECB, raising Bank Rate again, but perhaps for the last time.
Easing of business concerns and continued (although softer) consumer spending growth signal better-than-expected economic performance in the second quarter. But in the medium run, higher debt repayment burden for the government amid elevated rates could limit fiscal space, barring election-related pump priming. That’s bad news for productivity, a long-running painpoint for the UK economy. Globally too, the growth momentum is slowing.
The podcast that keeps you up to date with what is happening economy-wise in Northern Ireland. Telling you what you need to know but not necessarily what you want to hear. It is better to be prepared for the economic environment we are operating in and not the world we would like to be in.
Featuring Prof John Turner, Queens University Business School
