Chief Economist’s Weekly Briefing – Boiling

UK inflation jumped to 3.2% while the pace of US consumer prices cooled off slightly in July. The UK’s recovery stalled in July as the Delta variant roamed. Meanwhile, job creation remained strong in August as the end of furlough approaches. The future direction of the recovery remains unclear and soaring inflation puts pressure on the Bank of England’s response (which insists that rising inflation will be transitory). Interesting to see Governor Bailey’s response this week and what they intend to do to tame inflation.

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Finishing line in sight…or is it?

When measuring performance it is important to know what success looks like. It is also necessary to have suitable benchmarks to measure progress along the way.  As far as the economic recovery is concerned, getting back to pre-pandemic levels of output, activity and employment satisfies both these criteria. Earlier this week we saw that the number of employees on Northern Ireland payrolls hit a record high for the third month running having eclipsed pre-pandemic levels of employment back in June. On the face of it this looks like mission accomplished until you consider that this is flattered by furlough with 36,100 on the Job Retention Scheme as of the 31 July 2021. Furthermore, focussing on only one measure of labour market success can ignore huge failures in other areas – e.g. self-employment is down over one-quarter from its pre-COVID-19 levels.  

So what about output? How is it faring? 

It is perhaps worth rewinding back to what the output figures were showing over the last year or so. 

2020 was a year of extremes. Record rates of decline in Q2 followed by record rates of expansion in Q3. Lockdown restrictions had the effect of turning economic activity off and on. But as the pandemic progressed, subsequent lockdowns have been less severe on economic activity than the first. Many businesses have been able to adapt and function throughout lockdowns or pivot into new markets. All sectors with the exception of construction saw steeper peak-to-trough declines in this recession than the one that followed the Global Financial Crisis (GFC). The trajectory of economic output has largely followed a bungee jump. The initial fall and rebound being the most extreme, but subsequent declines and rebounds will moderate. For example, Northern Ireland’s private sector output fell by only 2.3% q/q in Q1 2021 – a period of lockdown – which compared favourably with the massive 19.5% quarterly contraction in Q2 2020 (Lockdown 1.0).

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Flattered by furlough… a jobs rewind beckons?

Lockdowns prompted a pause in the labour market with Rishi Sunak rolling out the safety net that was the Job Retention Scheme (JRS). With the play button then hit as many sectors went back to work. In more recent times, we’ve seen a fast forward in the labour market figures, with the number of payrolls rising for nine consecutive months and hitting a record high for the third month running in August. We may well see this trend continue in September. But with the furlough scheme ending in a couple of weeks, we know it isn’t going to be a straight-line recovery from there. The Jobs Retention Scheme has flattered the jobs figures.  But we’re now moving to a new stage of the recovery, a stage where stimulus is being turned off, inflationary headwinds are intensifying and the increased burden of tax rises is due to be felt from April 2022. We may well therefore see something of a rewind in the jobs data in the next few months as the labour market adapts to the post-furlough world. Don’t be surprised if we see payrolls fall back below pre-pandemic levels before the year is out.  Getting back to pre-pandemic levels of self-employment and hours worked will take quite some time.

So, what is the latest batch of labour market statistics from NISRA telling us?

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Chief Economist’s Weekly Briefing – Constrained

July’s sharp slowdown in UK GDP growth highlighted the supply- and demand-side challenges to the recovery. Supply chain disruption continues to be widespread and staff shortages remain an issue. Meanwhile, the largest tax shake-up in a decade is aimed at solving short- (Covid) and long-term (social care and ageing) funding challenges.

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Output growth softens to five-month low

Today sees the release of August data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by IHS Markit – showed signs of growth in the Northern Ireland private sector losing momentum, with both output and new orders rising at softer rates. Solid job creation continued, however. Meanwhile, near record increases in input costs and output prices were recorded.

Most of the UK regions saw business activity grow at a slower rate in August, and Northern Ireland was no exception.  Last month marked local firms’ slowest rates of growth in output, orders and employment in five months.  But a two-speed recovery was on show in August at a sector level. 

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Survival of the richest…

Recessions traditionally follow a standard playbook – a fall in output followed by a lagged rise in job losses and unemployment, triggering a decrease in consumer spending, hitting retail sales and the housing market.

The COVID-19 pandemic though spawned a new recessionary variant. The UK economy posted its biggest slump in output in over 300 years. Yet a comparable rise in unemployment did not occur. Similarly, a fall in house prices was viewed as a ‘no brainer’ but it too did not occur.

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Chief Economist’s Weekly Briefing – Wind Down

Covid-19 cases are on the rise again, especially in Scotland, where schools re-started three weeks ago. More data confirming a degree of caution set in amongst consumers mid-summer – UK net consumer credit growth dropped to zero in July and the savings rate is still unusually high. Meanwhile labour shortages appear to be intensifying.

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Chief Economist’s Weekly Briefing – Softer

Supply-side bottlenecks and ongoing struggles to fill vacancies are staging to drag on the recovery. And as we learned through July, rising caseloads can quickly turn consumers cautious. An upsurge in cases as schools return (and evidence of falling vaccine efficacy as time elapses) might conspire to be the next ‘bumpy’ part of the recovery.

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Podcast: Episode 10 – Survival of the richest – August 2021

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.

Recessions traditionally follow a standard playbook. A fall in output followed by a lagged rise in job losses and unemployment triggering a decrease in consumer spending hitting retail sales and the housing market.

That was the typical path of recessions. The COVID-19 pandemic spawned a new recessionary variant. The UK economy posted its biggest slump in output in over 300 years.  Yet a comparable rise in unemployment did not occur. Similarly, a fall in house prices was viewed as a ‘no brainer’ but it too did not occur.

Rather than double-digit declines in house prices, almost every major economy is reporting booming house prices, marking the biggest rally in more than two decades.

The local housing market has defied economists’ predictions too.


Chief Economist’s Weekly Briefing – Hey, it’s complicated!

Data releases are sending out mixed signals to the Bank of England’s MPC. On the one hand, there is rising evidence of growth slowing in Q3 as consumers turned cautious and firms struggled with supply-side shortages. Yet the labour market continues to recover rapidly with any slack declining fast. The latter could push up wages for longer, risking a firming up inflation expectations.

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