Chief Economist’s Weekly Briefing – Testing times

The incoming data for October shows what was widely expected, a slowdown in momentum. Mobility indicators have retreated as much of the world has reverted to some combination of reimposed restrictions. At least there are hopeful signs across countries of the latest wave having peaked or indeed being in retreat, but it is still early days.

Precautionary buying? The volume of UK retail sales picked up further in October, leaving them c.7% above their pre-Covid level. Two of the pandemic related trends continued to strengthen. First, households continued to reallocate their spending away from services to goods, especially towards household items. And second, online retailing remained a key driver of growth as restrictions limited mobility. And a third, new factor surfaced last month. Feedback from business shows that customers started shopping early for Christmas this year, helped by early discounts. Cyber…well, every day really.

Back in time.  Whether it is the English lockdown, Welsh firebreak, Northern Irish circuit breaker or tier 4 restrictions across much of central Scotland, November has seen a significant step up in stringency of measures designed to slow the spread of coronavirus. Those measures are also expected to slow economic activity, but early signs are that the impact is radically less than during the first lockdown. 82% of firms are currently trading, 3% lower than in October; 9% of the workforce are furloughed, up 1.3%; footfall is down too but only back to June’s level rather than the low hit in April / May. Once again hospitality will be hit hardest but for the economy as a whole this feels more like early summer than the shutdown of spring.

High & Low. Consumer price inflation quickened in October but remained below the BoE’s 2% y/y target for the fifteenth month running. But strip out recent tax changes (i.e. VAT cut) and CPI hit 2.4%y/y – a 26-month high and over three times the headline rate. Price rises for clothing, food and furniture helped push the annual CPI rate to 0.7%, up from 0.5% in September. Prices of consumer goods remained flat though some items saw big gains. Pizza lovers may have noticed rises of almost 8% y/y while second-hand car prices soared by 10.7%y/y.  Services charges rose by 1.4% y/y which is a full percentage point lower than pre-pandemic levels. But when the temporary VAT tax cut expires so might low inflation?

Mini-boom. The UK official house price index registered annual growth of 4.7% in September, taking prices to an all-time high of £245k. Similar data from Nationwide and Halifax suggest prices may further increase in October to surpass £250k. This mini-boom has been supercharged by pent-up-demand and the the stamp duty holiday. However, we may see some dampening in November, mainly due to lockdown The proposed mortgage guarantee scheme could be a blessing for first-time buyers and lend support to the market through 2021.  

7-year cycle.  The idea of a 7-yr cycle is not new. Many will be familiar with the Pharaoh’s dream of seven fat cows devoured by seven thin cows signalling seven years of great abundance followed by a similar period of famine. Following the 2007 property peak, Northern Ireland’s residential property prices experienced a six-year famine. Since then, they have enjoyed almost seven years of year-on-year growth with prices 47% higher than their 2013 low. But they remain 36% adrift of 2007’s ‘freak peak’. A 1.5% quarterly rise in Q3 took the standardised local house price to £143,205. That’s 2.4% higher than a year ago but the weakest annual rate of house price growth in almost 7 years. Prices in the Republic of Ireland fell by 0.8% y/y in Q3. Local prices could start heading south in 2021 too.  

Build Back Faster! NI’s housebuilding industry posted record rates of decline in Q2 as the lockdown closed building sites. But a swift recovery has since taken hold.  Housing starts rebounded in Q3 but were still 14% lower than a year ago. Indeed the latest period was the weakest third quarter in six years. Completions were more affected by social distancing restrictions, hence the 61% y/y slump in Q2 to just 691 dwellings. Many of those unfinished houses were completed in Q3 instead.  The latter saw 1,831 dwellings finished which represented a modest 1% rise over the year. Housing supply is set to post a second year of decline with 1,200 fewer properties completed  in the first nine months of 2020 relative to 2019. That offers some support for prices.     

Build back better. The Covid-19 pandemic has caused enormous disruption. But as an old saying goes – don’t let a good crisis go to waste. Last week the UK Government has announced 10-point plan for a Green Industrial Revolution. It has been framed as a means to create jobs, promote a green recovery and help the UK achieve its net-zero emissions target by 2050. It includes policies ranging from investment in energy efficiency to turning “water into energy” with investment in hydrogen.  

Innovation. Covid-19 has accelerated structural trends. Witness the increased usage of zoom calls amid the shift to working from home. Online spending has surged during the pandemic, rising to over 25% of total retail sales in October 2020. Contactless and remote payments have increased at the expense of traditional cash transactions. The fintech wave has had a significant impact on the provision of financial services, including insurance and asset management. London is now a major global hub for fintech, second only to San Francisco. Digital currencies could be on the agenda next though central banks, in general, are cautious. This would be another source of disruption.  

Tale of two gaps. Much of the world is trying to close varyingly gaping gaps in output compared to their pre-pandemic levels. By October, US industrial production had managed to recover much of its 16.5 % decline from February-April but remained 5.6% lower than February’s output level. In contrast, US retail sales had more than clawed back their 15% April decline as early as June. And have risen steadily from then. However, October’s 0.3% monthly rise in retail sales was, well, modest. As restrictions make a comeback, the pandemic continues to test.

Firing. As the year moves into its final stretch China can look back on a job well done in engineering an economic rebound. In the recovery’s infancy industrial production surged, helped by the West’s demand for electronic goods and medical devices. That bit of the economy is still solid, rising 6.9%y/y in October. Indeed, those nimble factories have captured a greater share of export markets, temporarily at least. The recovery in the consumer came later and is now humming with retail sales rising 4.3%y/y last month. Such is the strength of the recovery that the central bank looks likely to hold off on further support.  

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