Chief Economist’s Weekly Brief – Pitch a curve

Consumers have been driving the recovery in developed countries. But signs of fatigue are beginning to show. With much of the initial pent up demand sated and labour market stress building, policy makers are increasingly being called upon to do the unexpected. Is the Bank of England finally coming to terms with negative rates?

Expect the unexpected. The economic recovery in recent months has been stronger than initially anticipated. Not surprisingly, the Bank of England’s assessment of the economy’s health turned somewhat bullish. And the Committee unanimously voted to keep the Bank Rate and target for stock of asset purchases (QE) unchanged in its September meeting. But the Bank did throw a curve ball. Citing downside risks to growth (read Covid and Brexit), the Bank plans to explore negative Bank Rates. While policymakers get their head around this, the market implied path for Bank Rate turned negative!

You’re welcome. August saw UK CPI inflation dip to a near-five year low of just 0.2%, down from 1% in July. The popularity of the Eat Out to Help Out scheme lay behind the sharp decline, with enough discounts to create temporary deflation in the catering sector. So remember to thank Mr Sunak if your personal ‘consumption basket’ included lots of meals out last month. With a resurgence in virus cases and local lockdowns weighing on demand and Ofgem primed to cut the energy price cap next month, inflation looks set to remain subdued for the time being.

Decoupling. The UK labour market headline indicators continued to be in impossibly rude health in July, with an unemployment rate of 4.1% (NI remains sub-3% at 2.9%). But PAYE data shows the number of payroll employees are still 2.4% below pre-Covid level, this is after counting in the furloughed workers. ONS has admitted to limitations in data collection process as telephonic interviews have skewed the sample in favour of homeowners vs renters, the latter being in a more vulnerable spot. A reality check comes from the timelier BICS survey which continues to show c.10% of workers furloughed and redundancies on the rise.


Va va voom. How ‘V-shaped’ the recovery is varies by what you’re viewing. A strong contender for the most V-like is UK retail sales. The volume of sales rose by 0.8% in August and are 2.8% higher than a year ago. They are also 4% higher than in February. Yet despite this, COVID-19 has changed the way we shop and what we buy. So, non-store (mainly internet), food shops (mainly supermarkets) and home goods outlets are enjoying higher sales. Most others are struggling, especially clothes shops. We’re choosing tellies over trousers and lights over tights.

Tipping point. Northern Ireland’s Quarterly Employment Survey posted its first quarterly decline in jobs in four-and-a-half years. In a sign that the pandemic is impacting on employment. Total employee jobs fell by a modest 1,540 (-0.2%) over the quarter to June 2020. The winners and losers from COVID-19 are clearly identified. Human Health & Social Worker Activities posted its largest gain in almost six years (+2,200 jobs). Conversely, employment within Administrative and support activities dropped at its fastest pace in over 15 years (> 5% q/q) which equated to a chunky 2,900 jobs. Some 1,360 jobs were also lost in the hospitality sector between March and June. With 6,800 redundancies proposed since March and the Job Retention Scheme set to expire, expect more of the same in Q3 and Q4. 

Hanging on. At its peak, 8.9 million jobs were supported by the UK’s Job Retention Scheme (JRS). But the reopening of the economy has seen that figure tumble. Provisional estimates for the 31 July reveal that figure has almost halved to 4.8 million. In Northern Ireland the fall-off has been even greater with a 59% drop in furloughed employments since the peak of 249,600. At the end of July that figure stood at 102,600. Almost three-quarters of the NI JRS claimants are on full-time furlough with one-quarter back working part-time. The current figure is likely to be significantly less. Like a game of musical chairs, as time goes on, those people still on furlough are less likely to find a seat at their old desk. When the music stops tens of thousands are likely to find their job is no longer there.

Rock bottom. Records fell like ninepins in the latest Northern Ireland output statistics. Q2 was always going to be a shocker.  Services activity slumped by 17.7% q/q and -23.5% y/y. Private sector services output is almost one-fifth below where it was when the series began over 15 years ago! Those activities most affected by social distancing have been hit hardest. The ‘Other Services’ category – which contains arts, leisure, entertainment, dentists, beauty treatment and tattoo parlours  – saw output slump 39% q/q and 46% y/y. Industrial production (mostly manufacturing) fared little better with output falling 14.9% q/q and 22.2% y/y to a record low. One sub-sector did buck the contraction trend. Not surprisingly, Chemicals & Pharmaceuticals (includes Randox who produce the COVID-19 test) posted quarterly growth. The good news is Q3 can only get better!

Safe as houses.  For the last seven years the local housing market has been a one-way bet. Rising prices have been the order of the day with prices declining just twice in the last 28 quarters.  Lockdown froze the market leading to a 67% y/y fall in residential transactions. For those transactions that did go through, the standardised residential property price index rose 0.3% q/q. On an annual basis local prices are 3.0% higher than a year ago which compares favourably with the UK (+1.8% y/y) and the Republic of Ireland (+0.4% y/y). Q3 has been characterised by an outbreak of post-lockdown fever and pent-up demand. So further price increases could continue in the short-term. But thereafter, the reality of economic conditions, not least the labour market, are likely to bite. 

Getting moving again. Steadily and slowly the commute is making a comeback. In the 2ndweek of September 62% of UK adults travelled to work at least once, whilst 20% worked from home exclusively. The end of summer holidays and the return of schools appear to have prompted more mobility, with car traffic now just 3% lower than pre-pandemic levels. But don’t assume that this is simply a slow journey back to normal. In the same period retail footfall actually fell slightly, down to 72% of normal levels, vs 75% the previous week. While shoppers appear to have reached their new normal, many other areas of life remain far from it.

The new normal. Business activity picked up between early August and early September, according to the Bank of England’s regional Agents, but conditions remain very challenging. From a sample size of over 700 businesses, several reported investment decisions being cancelled or postponed. And prices are likely to remain sticky. While most firms had brought the majority of the furloughed workers back to work, some firms are planning redundancies later this year. A growing number of companies don’t expect their staff to return to city centre offices until 2021.

Lower for even longer. As was flagged at the Jackson Hole meeting, Federal Reserve Chair Jay Powell confirmed a new long-term monetary policy framework at September’s meeting, namely an average inflation target (AIT). US inflation will be allowed to overshoot its 2% target after undershooting recently. The Fed stated three conditions are now needed for a rise in US official interest rates: (1) “maximum” employment; (2) inflation rises to 2% and (3) inflation is “on track to moderately exceed 2%”. The Fed’s so-called “dot plot” revealed one member expects a rate hike in 2022, and four look for the first rise in 2023. Higher US rates appear a distant prospect.

Joining in. Chinese consumers were able to lend a helping hand to the recovery last month, amid a continuation of a loosening in Covid-related restrictions. Retail sales posted a year-on-year gain for the first time since the pandemic struck, rising by 0.5%. Eating out and fuels aside (which continued to decline) there was growth across the board with cars, cosmetics and clothes all rising compared to August 2019. Even cinema-goers chipped in. August’s box office revenues were estimated to be 90% of the previous year’s figure.Not bad in this climate.

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