Chief Economist’s Weekly Brief Cold Turkey

The pre-Christmas shopping rush seems to have coincided with inflation’s peak. Consumers and retailers alike will be hoping for an easier ride this year. 


Cooling. Inflation looks to have passed its peak. Consumer prices rose by 3.0% in the year to December, down from 3.1% in November. Much of last year’s elevated inflation was due to sterling’s depreciation. That effect was always likely to fade during 2018. But the inflationary impact of weaker sterling has partly been replaced by a higher oil price: it’s up from less that $60 per barrel in November to almost $70. As long as the oil price does not move much higher, inflation will moderate during 2018.
Cold. December’s retail sales confirmed that UK consumer behaviour in the run-up to Christmas is changing. We’re doing more spending in November as promotions such as Black Friday lure Christmas pounds out of pockets before December. Unfortunately that can’t be used as an excuse for the underlying trend. For the final three months of the year the volume of retail sales grew by 1% y/y. Rewind 12 months and that pace was 6% y/y. Hence the pessimism on the UK High Street. Sales are much weaker compared to recent history, with higher inflation being the primary culprit. At least in Northern Ireland the High Street continues to benefit from cross-border shoppers, providing a much needed boost.

Puzzling. Another day, another explanation of the productivity puzzle. Silvana Tenreyro of the MPC says that 75% of the post-2008 fall in productivity growth took place in manufacturing and financial services. Since these sectors had enjoyed rapid growth in the 2000s the real story might be that they had masked a much broader slowdown elsewhere. She reckons that two-thirds of the decline after 2008 is the result of weak capital investment but is optimistic that investment will recover as Brexit uncertainty lifts. It’ll be good news if she’s correct.

Momentum. The UK housing market continued to display a lack of momentum in December with little indication that this will change as we move into 2018. That’s according to the RICS Residential Market Survey. Northern Ireland surveyors by contrast are quite optimistic about the near-term outlook for prices and sales, and are a reasonably sanguine in relation to their expectations for 12-months’ time. Supply though remains the watchword, with respondents to the survey suggesting that new instructions to sell were broadly flat in December. Only when supply increases can sales activity gain true momentum. For now though, the lack of properties coming onto the market could keep upward pressure on prices.

Role reversal. Europe’s GDP growth has been taking off recently leading to speculation that 2018 will be the year that the European Central Bank starts to meaningfully withdraw stimulus. It won’t be in a hurry though. The latest inflation figures actually show a slight fall in price growth, down to 1.4% in December. Big countries like Italy, Spain and France are all below that average with inflation close to 1%. Even booming Germany only has prices rising at 1.6%. That should give Draghi time to move slowly.
Less miserables. Is the grass greener in Ireland? It seems so if you go by Arthur Okun’s ‘Misery Index’ which combines a country’s unemployment rate and its inflation rate. Ireland’s unemployment rate ended 2017 at a nine-and-a-half-year low of 6.2%; no mean feat when you consider that it stood at a whopping 15.9% in late-2011. The UK’s unemployment rate – at a 42-year low of 4.3% – is lower, but inflation in the UK is much higher. Ireland’s inflation rate is currently running at 0.5% compared to the UK’s 3.0%. This gives Ireland a Misery Index reading of 6.7% compared to the UK’s 7.3%.

Like clockwork. For the first time since 2010 China’s growth picked up last year. Growth came in at 6.9%y/y, as ever remarkably close to the government target of “around 6.5%”. Infrastructure spending ahead of the autumn’s Party Congress helped things along. But so too improved global growth. Scepticism over China’s growth figures wasn’t helped by recent revelations that some northern provinces had downplayed the extent of their downturn between 2012 and 2016 (and therefore underplaying last year’s rebound).
Fit at 60. Two icons turned 60 this year: Lego and the Family Spending Survey. By recording how we apportion our spending, the latter helps measure inflation. It also sheds a wonderful light into our changing behaviour. We spent £554 a week on average last year, enough to finally lift average spending above its pre-downturn peak in real terms. But things have changed since 1957. We now spend double what we did on our homes on average (18% vs. 9%), while our food share has halved to 16% (meaning a third of our spending used to go on food). A further 6p in every £1 used to go up in smoke, quite literally, on tobacco. It’s now 1%. Spending on alcohol has remained the same at 3%. The 70s and 80s were the boozy years, when it reached 5% of spending.

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