Chief Economist’s Weekly Brief The snowflake economy

Last week’s snow induced disruption will have heaped pressure on sectors like retail, leisure and construction. Firms will have to fight hard amid cancellations to manage cash flow and clear backlogs. It might even knock a tenth of a percent or two off Q1 GDP growth. But it is consumers’ attitudes to borrowing which is raising bigger questions for the health of the economy.

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Buy now, pay later. The retail sector has had a tough start to the year with some big names heading into administration. Last week’s snow will have made things even worse as shoppers stayed away from the high street. So it is unfortunate timing that January’s lending data showed even more UK spending is occurring on credit. Credit card balances rose at almost 10%, suggesting consumers are still keen to buy now and pay later. Whether this is from renewed confidence in their future finances or because the cash ran out over Christmas remains to be seen but will have big consequences for future growth.

Turning tide. Consumer credit might be threatening double digit growth, but companies are being much more cautious with their finances. Borrowing in January by UK businesses was only 1% higher than a year ago. That’s quite a slowdown given that growth of 2-3% was typical through most of last year. Even more striking is the behaviour of different sized firms. Broadly speaking, large companies are still borrowing, but SMEs now owe no more than they did in January 2017. Is this Brexit uncertainty finally beginning to bite, or a gradual response to the Bank of England’s message that we should expect rates to rise? Either way, the contrast to the behaviour of households is stark.

Pause. New year, new speed, with the recent renaissance for UK manufacturing seemingly stalling since January. The only question is whether it’s a blip or the end of a relatively short lived era. The Manufacuring PMI slowed to an eight month low of 55.2 in Feburary (55.3 in January) after reaching almost 60 in November. Translating to GDP suggests the 1.3% increase in manufacuring in Q4 will not be repeated in Q1. Nonetheless, both new orders and optimism remain high, so the show may not be over. Little such hope for construction. Output rose to 51.3 yet has hovered around 50 since the end of last year and, while confidence is low, industry costs are rising. So this week eyes will focus on how the dominant service sector is performing.

You pays your money. It’s hardly a surprise to discover that London is the priciest place in the UK: consumer prices there are 7% abive the UK average. In contrast, bargains are to be had in Northern Ireland where prices are 2% below the UK mark. So, we should all move to NI and be better off? It’s more complicated than that. Full-time wages in London are 23% above the UK average while in NI they’re 12% lower, more than eliminating the losses and gains from price differentials. And then there’s housing where you can buy almost four homes in NI for each one in London.

Blue Jay Way. US GDP in Q4 2017 was confirmed at 2.5% at an annualised pace, buoyed by the strongest pace of consumer spending in three years and solid business investment. And the new Fed Chair appears to hold plenty of enthusiasm over the economy, remarking last week that his outlook had “strengthened” since the Fed’s meeting in December. It was Jay Powell’s first public comments on Fed policy since succeeding Janet Yellen. Markets took heed, raising their odds of at least three rate hikes this year to 70% while also raising the odds of four or more hikes to 30%.

Descending. Unemployment across the eurozone continues to head in the same direction as temperatures of late – down. The jobless rate was 8.6% in January with the previous month’s revised from 8.7% to 8.6%. It’s the lowest rate since December 2008 with the number of unemployed down 1.4 million in just a year. But the eurozone’s much trumpeted recovery still has work to do. Unemployment remains above 11% in Italy and as high as 9% in France. In Germany it stands at 3.6% with anecdotal reports of labour shortages. Remind me, one of the principles underpinning free movement of labour is….

Happiness. Like Churchill on democracy, GDP is the worst way to measure an economy, apart from all the others. One criticism is GDP fails to measure the things that matter, like happiness or anxiety. So the ONS produces a ‘personal wellbeing index’. The good news is that we were slightly chirpier in 2017 than in 2016 – and we’ve getting steadily more perky since the index began in 2012. Women tend to feel happier, more worthwhile and yet also more anxious than men. Oh, and we’re most happy in our 60s and 70s, least happy in our 40s. Sounds about right.

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