Chief Economist’s Weekly Briefing – Spring healing

The onset of Spring is a reminder of renewal and growth. And so the world economy continues to heal. That positivity is reflected in the latest economic data as well as IMF’s latest outlook, which points to higher growth and less long-term damage than previously expected. Similarly, the 12-month outlook amongst Northern Ireland firms is at a 13-month high. But what confidence there is could be dented by the current political situation and negative news headlines.

Onward and upward. UK card spending rose 10pts in the week to April Fool’s Day (no joke!) – with purchases now 88% of their Feb 2020 average. Note online jobs adverts are at 97%, sweetly supporting news that vacancies are also rising. So, true to spring, job opportunities are emerging. And with England, bear-like, waking from winter hibernation on the 8th, the economy should continue to improve. Perhaps rapidly too, as footfall-famished consumers look to relieve themselves of (some of) their savings with some post-lockdown retail therapy. These should be the good months. Enjoy them.

Convergence. The latest monthly regional PMI survey revealed improving business confidence across all UK regions last month. The main driver was the government’s announcement of a reopening of non-essential retail, providing a significant boost to demand. Labour market conditions are clearly improving. Witness news that ten out of twelve UK regions (including NI) reported increased hiring last month. The exceptions were Wales and Scotland – both regions saw continued caution on employment plans. Meanwhile, increased supply-side constraints and Brexit are boosting input prices whilst rising demand is encouraging more firms to pass on higher prices. A harbinger of rising inflation in coming months?

Outlier. Northern Ireland ended the first quarter of 2021 with output still falling, but only just. NI was the only region of the UK not to experience output growth in March. Whilst the rest of the UK has benefited from some easing of lockdown restrictions, Northern Ireland still has this activity boost ahead of it. The local economy did see a bounce in retail activity last month, but this strong growth in sales and new orders was coming off very weak levels. Encouragingly local firms increased their staffing levels for the first time in 13 months due to job creation in manufacturing and services. However, the growing issue is inflation. Firms reported a record rate of input cost inflation and are raising prices at the fastest pace in the survey’s history. 

Double dipping. The local economy dipped back into contraction territory in Q4 2020 following the record rate of expansion in the previous three months. NI’s Composite Economic Index (NICEI) which is the closest statistic to GDP that we have fell by 1.4% q/q and marked the fifth quarterly fall in the last six quarters. Construction was the only sector to record a second consecutive quarter of growth with construction activity hitting a 10-year high. Courtesy of Q3 2020’s record rebound, NI’s Composite Index has recouped just over two-thirds of its decline that occurred between Q3 2019 and Q2 2020. That means the composite & private sector output indices are broadly in line with 2014 levels. 

Green light.  Despite recording the best month of sales since September, March proved to be another terrible month for UK car dealers. Locally sales surged by 48% y/y but were still represented the second worst March figures on record. With showrooms shuttered, new car registrations were more than one-third below the long run average. Exit from lockdown should bring relief but for now the only sign of green shoots comes from the transition to greener motoring, which is gathering pace. UK sales of plug-in hybrids rose 152% y/y last month, hitting record highs. Together with fully electric models, these low-emission vehicles made-up almost 14% of all sales. In a sign of the times, the Tesla Model 3 is now one of the top five best-selling cars in the UK .

Upgrade. Since the IMF’s last forecast update back in January advanced economies have been busily rolling out vaccines. Reflecting that success, the Fund is much more upbeat on prospects for the recovery. Early this year it was pencilling in growth of 4.5% for the UK in 2021. That’s been lifted to 5.3. All the major advanced economies have seen an uplift. But the remarkable story is the US. The IMF has doubled its estimate of growth this year to 6.4% compared to its October estimate. And that’s after a ‘mere’ 3.5% fall last year (keep in mind the UK economy contracted 10%).

Costs. The IMF has been busy, too. Digging into the potential lasting damage, or ‘scarring’, of the Covid-19 crisis. Most recessions leave persistent scars, predominantly through productivity growth and slower capital accumulation. One of the ways productivity is hit is a shock concentrated in some sectors bleeding out into others. The rather unique nature of the sectoral propagation amidst this crisis potentially means less long-term damage. The current shock has been concentrated in sectors peripheral to production networks (i.e. high-contact service sector) as opposed to those more central (e.g. energy and financial intermediation), potentially resulting in limited scarring.

And another upgrade.….so factoring in its own analysis and other elements, including the unprecedented policy response, the Fund is more optimistic on the lasting damage from the crisis. For advanced economies it estimates that the loss of output compared to the pre-Covid forecast will be less than 1% of GDP. By comparison the financial crisis caused a 10% hit. Again, the most impressive outcome would be the US. The IMF Chief Economist describes it as having “effectively no scarring”. And it’s there where fiscal policy has been dialled up to 11. There’s a lesson there. 

Stable. The Euro area unemployment rate was unchanged at 8.3% in February 2021. The story in the single-currency area remains similar to the UK – furlough schemes are preventing a more material labour market fallout. And while all rises are limited, cross country variation remains pronounced in level terms. The unemployment rate is 16% in Spain, 10% in Italy, 8% in France and 4.5% in Germany. And a mere 3.6% in the Netherlands.

Silver surf’s up. The latest snapshot in Q1 2020, which predates the big lockdown logon, revealed 92% of adults were recent internet users. That’s up 1% on 2019. London (95%) and Northern Ireland (88%) had the highest and lowest rates of usage. Internet usage is more prevalent amongst the younger age-groups with more than 99% of 16-44 year olds logging on. But the number of silver surfers is rising too. The biggest annual jump was amongst the over 75s with a 7pp rise to 54%. That compares with just 29% back in 2013. Only 7 out of 10 retired people recently used the internet. We can expect a notable rise in the 2021 figures.

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