It’s Bank of England decision time this week as the MPC will meet to set (and likely raise) Bank Rate. How are we placed currently? For one, the economic downturn is gathering steam. For another, businesses appear in no hurry to stop raising prices, even with energy prices coming down. But cost of living concerns remain entrenched. Difficult territory. And plenty for the Bank of England to ponder whether to bring its rate tightening cycle to an end.
Last week saw a plethora of key economic releases, what’s the gist of it? Still a mixed picture. Chinks of light in some areas, but telltale signs of mounting challenges in others. Retail spending was down despite the seasonal boost one would expect from end-of-year holidays, higher rates are crimping demand for credit and dragging down the housing market. Granted, consumer prices are in retreat but too slow for now to actually make a difference on living standards.
Two weeks in and has the bad news poured in? Well not yet, but there’s plenty to be concerned about. Did the UK end 2022 with a recession? It may have just been averted (not so in NI). But the base case is it has only been delayed. What’s certain is that the cost-of living crisis is far from over, and borrowing costs will rise further before they come down. Businesses and mortgage owners, brace yourselves. The good news is the £600 energy vouchers for local households are in the post. But there’s still a long and bumpy ride left to run.
DECEMBER PMI: Today sees the release of December data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – pointed to a difficult end to 2022 as new orders fell sharply again and the rate of decline in output accelerated. Employment was unchanged, following 21 months of job creation. Meanwhile, inflationary pressures moderated.
Northern Ireland’s private sector started last year in expansion mode as the post-pandemic economic recovery gathered pace. Last January, businesses were optimistic for the year ahead with the expectation that growth would continue. This proved not to be the case. Largely as a result of the Russian invasion of Ukraine, which added fuel to the cost-of-living crisis, growth petered out and confidence ebbed away. Northern Ireland’s private sector therefore ended the year on a much more negative note. December saw output and orders fall for the eighth successive month. The contraction in output was the steepest in a decade outside of lockdowns. All four sectors posted declines in output and orders although retail, services and construction firms did increase their staffing levels. The good news is that inflationary pressures moderated with firms reporting the weakest rise in input costs in 22 months. As a result, firms raised their prices at their slowest pace in almost two years. But these price rises still exceed anything that occurred in the pre-pandemic era. This time last year, firms were braced for a challenging year, but it turned out much worse than anticipated. December’s report suggests that negative sentiment is receding and that we may have passed peak pessimism. This year, expectations for the 12-months ahead are low but we could see the converse of last year with expectations being exceeded this time around.
The main findings of the December survey were as follows:
The headline seasonally adjusted Business Activity Index fell sharply to 41.6 in December from 46.0 in November, pointing to a much faster reduction in output in the private sector at the end of 2022. In fact, the decline was the steepest since February 2021. The cost of living crisis was reportedly a key factor behind the drop in activity as new orders continued to fall sharply. Activity decreased across all four broad sectors covered by the survey, with the fastest reduction in construction.
Employment was unchanged in December, thereby ending a 21-month sequence of job creation. While some firms were able to expand their staffing levels, others reported voluntary resignations and difficulties recruiting. There were further signs of inflationary pressures moderating in December, with both input costs and output prices rising at the slowest rates since early-2021. That said, prices continued to increase rapidly. Where input costs were up, panellists mentioned higher costs for energy and transportation. Suppliers’ delivery times continued to lengthen, with delays linked to Brexit and postal strikes. Although companies remained downbeat on the prospects for output growth during 2023 due to the cost of living crisis and political uncertainty, sentiment improved to an eight-month high.
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 Andrew Webb, Chief Economist at Grant Thornton
Last year was tumultuous for the UK to say the least both in terms of politics and economics. We witnessed 4 Chancellors, 3 Prime Ministers in the space of two months and two monarchs. The UK said farewell to its longest-reigning monarch Queen Elizabeth II and its shortest serving Prime Minister – Liz Truss. Liz’s mantra was Go big or Go home and she did both in the space of 44 days.
Trussonomics – through the misnomer that was the “Mini-Budget” threw fuel onto a cost of borrowing crisis which was a new angle to the wider cost of living crisis. That rounded off the year with a recessionary threat clouding the outlook and a Mexican wave of strike action taking place throughout the UK.
And that was just at home. Globally, geopolitics loomed large in 2022, not least following Russia’s invasion of Ukraine, with geopolitics exerting a far greater influence and shaping the outlook in a way it hasn’t done in years.
Against this backdrop it is not surprising that the Collins English Dictionary word of the year was “PERMACRISIS”.
Despite these multifaceted woes, Northern Ireland continues to battle these challenges with one or even two hands tied behind its back with no functioning Executive in Stormont.
Last year was tumultuous for the UK to say the least—from the cost-of-living crisis, to witnessing three PMs in a mere two months, to the end of the rule of its longest-reigning monarch, and rounding off the year with a recessionary threat clouding the outlook. And that was just at home. Globally, geopolitics loomed large in 2022, exerting a far greater influence and shaping the outlook in a way it hasn’t done in years. What does 2023 have in store?
Following the Russian invasion of Ukraine last February, the general direction of travel for the UK and Northern Ireland economies has been down. Consumer confidence has plunged in the wake of rocketing inflation and the evolving cost-of-living crisis. Despite this deteriorating consumer outlook, new car sales ended the year on a high – at least in relative terms. The improvement in new car sales largely reflects an easing in the supply-chain disruption that has blighted global car manufacturers since the pandemic struck. Consumer sentiment and confidence in supply-chains (shorter-delivery times) are moving in opposite directions. The steady increase in new car sales in recent months is largely linked to fulfilling orders made in Q3 and Q4 2021. Back then the cost-of-living crisis had barely begun and interest rates were still plumbing record lows. In short, consumer confidence was robust.
The latest NI data dump from NISRA suggests that the local economy has dodged a technical recession (i.e. two successive quarters of contraction) due to marginal growth in the most recent quarter. This was perhaps unexpected. But output edging above the contraction mark rather than below it will be of little consolation to, or consequence for, households across NI struggling to pay heating, electricity and food bills.
This week, many will be raising a glass to the festive season as we enter the peak time for Christmas parties. But the Bank of England will be playing party pooper by raising interest rates again on Thursday for the nineth consecutive meeting. And overall, for those looking something to celebrate, the positives in the economy – locally, nationally and globally – seem to be in short supply.
It’s MPC week again. Although much of the turmoil that Bank of England had to grapple with in its November decision has now faded, it still faces a finely balanced decision. The UK has the worst growth outlook among the G7, its workforce is shrinking, buffeted by the impact of Long Covid, and inflation expectations have risen. While the festivities are masking some of this, fears over a post-Christmas slump are on the rise too.
