Chief Economist’s Weekly Briefing – ‘Exhausted’ but ‘hopeful’

This week’s title draws on the most popular words being used to describe 2020 and 2021 according to a recent survey. Well barring the expletives! The fight against the virus has left the world worn out but this has not prevented households and businesses from hoping for a better future, even when new challenges continue to arise. So it’s a hopeful note that we end our year on.

Blue Christmas.  The latest intelligence from the Bank of England’s Agents lays bare the gulf in performance across different parts of the economy.  Many consumer facing businesses continue to suffer, not least the hospitality sector, which experienced a material drop in sales during the November lockdown.  Demand for business travel, hotels and conferencing remains depressed too.  But all the extra time being spent at home is supporting steady growth in manufacture of electrics, household goods and furnishings.  And businesses supporting new ways of working are also experiencing strong demand, whether IT companies facilitating home working, firms advising on employment law or manufacturers producing items relating to COVID-security.

Sinking feeling. A returnof lockdown restrictions last month led to an inevitable contraction in local private sector activity in November. Northern Ireland was one of seven UK regions, alongside the Republic of Ireland, falling below 50 – the PMIs expansion / contraction threshold. Northern Ireland’s (45.6) contraction was the steepest within the UK but was on a par with the Eurozone. Meanwhile all 12 UK regions continued to reduce their staffing levels at a fair clip. The arrival of COVID-19 vaccines provided a shot in the arm for business confidence looking twelve months ahead. That good news, however, has been followed up by a nasty one-two combination from a six-week lockdown (beginning Boxing Day) and supply chain disruption courtesy of Brexit and a new variant COVID-19 strain.

Going cheap. UK retail sales posted a 3.8% month-on-month fall in November, the first monthly decline in retail sales since April, driven by the adverse impact of the one-month lockdown in England last month. Consumer continue to shy away from traditional areas of spending. Witness the slump in clothing sales last month. In contrast, food sales increased in November as more households were forced to stay at home. The inexorable rise in on-line spending continues apace, reaching 31% of total retail sales last month. The re-opening of shops on December 2nd should provide a short-lived boost high street sales in the key Christmas trading period but Tier 4 restrictions mean the outlook has grown less certain for many.

Still needing support. UK unemployment crept up to 4.9% in the 3 months to October as redundancies pushed past their financial crisis peak to reach 370,000. The extended furlough scheme should prevent that figure from racing even higher in the next few months but with roughly 15% of the workforce still furloughed it is clear just how much repair to the jobs market needs to be done. And it is the least experienced workers who need the most help. Young people have accounted for three fifths of job losses so far, as well as making up a disproportionate share of those still on furlough.

R number. The health crisis has focussed on the R number. Within the labour market, the R number – that is redundancies – is attracting a lot of attention too. Almost 11,000 redundancies have been proposed by local employers over the year ending in November 2020. That represents a record high with 1,370 proposed last month alone.  While the local unemployment rate (3.9%) remains numbed by the furlough scheme, signs of stress are mounting elsewhere. Male self-employment in the three months to October was almost 17% lower than a year ago – a record decline. Meanwhile the number of NI employees in Q3 recorded the first annual fall in eight years. Three successive quarters of decline have led to a net loss of over 5,100 jobs so far. When the job support measures are finally withdrawn, this total will soar.

Rebound. Q2 revealed record rates of output decline the like of which no economist forecasted. Lockdowns throttled the economy and when restrictions were lifted output could go only one way – UP! Northern Ireland’s private sector services posted a record quarterly rate of expansion of 22.5% in Q3 which recouped over 90% of output lost since Q4 2019 (pre-pandemic level). Though services turnover still matches the level back in Q1 2005! Industrial Production also revealed record rates of expansion in Q3 (16.2% q/q) across a variety of industries and manufacturing sub-sectors.  More significantly there were some manufacturing sub-sectors (pharma, textiles, rubber / plastics) reported their highest levels of output on record. These were the industries that benefitted the most from COVID-19. Overall, however, manufacturing output is still 10% below the average recorded between 2010 and 2017.

Muted. Resounding the message coming through in the ONS survey, December PMI print crawled over the watermark level. For context, November reading fell to 49 as the second lockdown arrested economic activity in non-essential retail sectors. Breakdown by sectors shows that services continued to suffer in the first two weeks of the month as a higher share of the country landed in tier restrictions compared to October. But manufacturing sector continued to benefit from Brexit related stockpiling. On the whole, the recovery was at a subdued pace and this too could get reversed by a third wave of infections.

Bleak midwinter. Economic growth may hopefully flower again in December, but with caveats mind. First, the run into Christmas is traditionally a time most retail businesses squirrel away goodies for leaner months. Second, the late Nov/early Dec rebound is a relatively muted affair. More businesses are open (80%) and more of us travelled to work (58%) and more of us bought fun stuff (1/4 of us, the highest in nine weeks). Better news is that ‘tables’ were 84% 2019 occupancy. But be warned. Lockdown 3.0 would lead to particularly chilly January.

Easing. The headline rate of UK inflation fell to 0.6 y/y last month, down from 0.9% y/y. There was a big downward contribution from clothing and footwear as lockdown and Black Friday brought plenty of discounting. UK inflation has been on a general downward trend for two years, with decline more pronounced amid the pandemic – the core rate is just 1.1%. Beyond the near term, a growing band of economists think an inflationary regime change is on the cards, with a structural shift higher in the coming years. But for the moment, it is still a low inflation world.

Uncertain with a chance of vaccines. At its latest meeting, the Bank of England’s Monetary Policy Committee judged that the existing stance of monetary policy remains appropriate. It voted unanimously to maintain the Bank Rate at 0.1% and the target for the total stock of asset purchases at £895 bn. The Committee also extended the TFSME by six months. But their  outlook for the economy remains unusually uncertain. The successful trial of Covid vaccines and initial plans to roll them out widely over the first half of next year is likely to reduce the downside risks to the economic outlook from Covid previously identified by the Committee.

On hold. The Federal Reserve decided to leave its policy stance unchanged in its last meeting for the year. This was evident in the announcement made by the FOMC (Federal Open Market Committee) that they will strive to maintain the funds rate within a target range of 0 to 0.25% to stabilize inflation, which has been consistently low due to weak demand. Another robust decision to increase holdings of treasury securities was announced to support the smooth functioning of the cogs of financial markets. The Committee looks determined to ensure maximum support for the economy ‘till their goal of maximum employment is accomplished.

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