Chief Economist’s Weekly Briefing – Light at the end of the tunnel

It’s less than the first but there’s no masking the impact the second lockdown had on the UK economy. It sent more workers back to furlough, car sales plunging, job postings stalling and footfall dipping. But an earlier than expected arrival of a vaccine could help galvanise the recovery not too far into the New Year, well hopefully!  

Money talks. The UK housing market stampede continued in October with close to 100,000 mortgage approvals, the highest since Sep’07. That apart, cautious behaviour and less avenues to spend means households continue to build cash reserves and repay unsecured borrowing, mainly credit card and loans. On the other hand, a dichotomy clearly exists within businesses. While large businesses have benefitted from capital markets, smaller firms have relied on bank loans for funding, with growth in SME lending standing at an unprecedented 24% y/y. Like households, firms too continue to build their war chest.

Nimble. New car registrations continued to weaken in November, as non-essential retail closed shop again due to the second lockdown in England. But the fall of 27% y/y was nowhere close to the trough seen earlier this year (-97% y-o-y in April), thanks to ‘click and collect’ capability and home deliveries. While it is welcoming to see signs of adaptation in the sector, indications are that underlying demand is flagging. Consumer confidence indicators have weaknened while signals of a tightening of unsecured credit supply, evidenced in the BoE consumer credit survey, is another potential headwind.

A year to forget. Buying a brand new set of wheels hasn’t been top of consumers’ priorities in 2020.  Last month was the worst November for UK dealers since 2008 with new car sales plunging 27% y/y. On the face of it, local showrooms fared better with the worst November in ‘only’ eight years and recording just a 7% y/y decline. But both are experiencing record year-to-date declines of close to one-third relative to last year. For NI, that equates to 15,000 fewer new cars or 32,000 fewer than the Go-Go years in 2007!  With unemployment set to surge in 2021, next year is set to be a challenging year for dealers of new cars and consumer sensitive sectors in general.

More, but less. An identifiable impact of the second lockdown, but less than the first one, remains visible in the latest ONS data. We’re travelling to work less – about 54% of adults did so in the last week of November, having been as high as 65% in early October. Meaning there’s more working from home, with about 30% of adults doing so (it had been as low as 20% in last August). While 15% of us are furloughed (up from about 9%). The impact on businesses remains pronounced compared to pre-Covid – nearly half of businesses experienced a decline in turnover compared to normal for this time of year.

Relief.  Winter with the virus is proving tough on many levels. But pain is always easier to bear when an end is in sight. UK business leaders certainly reacted enthusiastically to vaccine breakthroughs. Sales are now expected to rebound rapidly: from 15% below normal in late 2020 to just -2% by mid-2021 (a 6ppt improvement since last month). Uncertainty over the outlook diminished. And businesses are much less downbeat on the jobs outlook, expecting employment to be 3% lower in mid-2021 vs. the 7% drop they foresaw last month. This injection of optimism may just carry the economy through.

Still in the woods. External Monetary Policy Committee member, Michael Saunders, delivered a timely speech for the recovering economy. Positive vaccine results have lifted UK economic sentiment, yet we are in unusually risky times with headwinds that could strand us with persistently high unemployment and below-target inflation. If further stimulus is required a range of tools (rate cuts, asset purchases, forward guidance) will be more effective than just one. Of course, it may happen that we recover much faster. But just in case Christmas wonder escapes us, we know the MPC is looking out for us.

No service. International trade contracted sharply in Q2 when lockdown measures were in place in many countries. Now we are getting additional details on the impact on trade in services within the UK. Imports and exports of services contracted by 32% and 19% respectively in Q2 compared with the same quarter last earlier. Falls in imports and exports were largely seen in travel and transport services, and falls in exports in other business services. Cue another startling figure on the impact on global tourism – total travel imports decreased by 89% and exports by 71% in Q2 compared with the same quarter last year.

It’s your time. The week Boris Johnson accelerated plans for reducing the UK’s carbon emissions to 68% by 2030 official figures showed we’re currently down by 34%. Now, there’s a slight apples and pears effect here (these figs include biomass, the official target controversially does not). The top three emitters are transport and storage (15% of the total), energy (16%) and us, the consumer, accounting for a whopping 26%. But while energy emissions have fallen by 60% since 1990, consumers’ are up 2% and transport’s by 28%. Squaring this circle means one thing. Accelerated transition costs are coming.

Third wave strikes. US non-farm payrolls posted a 245k rise in November following a 610k increase in October, below market expectations. Employment growth has clearly softened during Q4, driven by the adverse impact of increased restrictions in response to a renewed surge in covid-19 cases. The unemployment rate dipped to 6.7% compared to 6.9% in October (it had peaked at 14.7%). It still means that there were 10.7 million unemployed in November, 4.9 million higher than in February. Pressure is mounting on Congress to act sooner than later to pass a stimulus and cushion the fallout.

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