Chief Economist’s Weekly Briefing – Bumper year?

As the report card on opening up improves, so does the growth estimate for 2021. The latest to join the bandwagon is the Bank of England which is now forecasting the UK economy to enjoy the fastest growth since the Second World War. That will pull the Northern Ireland economy up too. The Chancellor also expects the recovery to be ‘turbo-charged’ by the excess savings of households and firms.

The Bank of England, City of London, UK, at night

Back with a bang. The Bank of England’s latest forecasts show an economy surging back to strength over the spring and summer.  Headline growth of over 7% for 2021 is almost unprecedented for the UK economy, but of course most of that is simply catching up to where we were before Covid19 struck.  That milestone is now expected to be passed in Q3 this year and is driven by households saying that they plan to spend more of the Covid-induced savings than they expected before.  The extension of the furlough scheme and this stronger growth also indicates that unemployment may peak at just 5.4% (vs 7.75% as per Feb forecasts).  All unemployment is unwelcome, but a peak as low as that would be a big help to job-hunters.

Brighter prospects. The April DMP survey reported that UK businesses expect an improvement in the near-term performance of sales, employment and investment. Swift vaccine rollout accompanied with the easing of lockdown restrictions is likely to pave the way for unwinding of pent-up demand. Further, the measures announced in the budget also helped bolster the sentiment around the investments. The share of employees on full-time furlough fell to 9% in April, from 14% in March. Overall uncertainty continued to fall in April, with share of firms reporting high or very high-level uncertainty level fell to 51%, the lowest level since February 2020.

A marathon. With little major moves from the latest indicators data, it’s a chance to reflect where we are. While UK card spending is at its Feb 2020 level (99%), we’re spending more on staples (115%) and delayable stuff (106%). With work-related and social spending now also rising. Indeed, UKtable reservations are at 71%. Yet they’re at 90% in Manchester and just 43% in London. The capital’s scars will run deep. And 60% of workers now travel to work, up from 44% in Feb. In short, the news is good but the journey’s long.

Stratospheric.  Ever wonder how people respond to financial incentives?  March witnessed more than £35bn in UK mortgage lending, the highest ever recorded, as droves of homebuyers rushed to complete purchases ahead of the planned end to the Stamp Duty holiday.  With the temporary relief now extended until June, Q2 looks set to be similarly strong.  Meanwhile, household savings continue to pile-up.  More than £16bn was deposited into bank accounts in March, bringing the total since the pandemic struck to almost £200 billion. Having also repaid £29bn in unsecured credit over the same period, consumers look well positioned to lead the recovery.

All about the base. UK new car sales soared by a whopping 3,177% y/y last month. But this 30-fold rise is a reflection of how bad April 2020’s lockdown low was rather than how strong activity is this year. This is what economists call ‘base effects’, in this case rebounding off an extremely low base. Despite the biggest year-on-year increase on record, UK sales in April were still almost 13% below the decade average. Similarly in Northern Ireland, new car sales rocketed by close to 14,000% y/y in April but last month was still the second worst April on record and 20% below the decade average pre-COVID. With dealerships now reopened NI & UK look set for strong sales growth in 2021.

Shortages. Availability of raw materials and skills are two concerns highlighted in the latest Tughans Manufacturing NI survey. Close to half of local firms cite problems recruiting skills to meet orders. Meanwhile the availability of raw materials and supply chain issues are affecting two-thirds of manufacturers. COVID-19 has disrupted global supply chains with supply shortages triggering price rises. Adding to this cost of doing business is increased bureaucracy / red tape – linked largely to the NI Protocol – for more than half of firms. A key concern remains the unwillingness / unpreparedness of GB suppliers to engage with the new requirements. Unsurprisingly 37% of firms believe supply chain disruption is the biggest obstacle to their firms’ recovery.

£220bn question. In 2019 UK trade in services with the EU amounted to roughly £220bn, with a £20bn surplus (conversely our trade in goods was £440bn with a £100bn deficit). We already saw that trade in goods declined sharply in January. But the first survey data suggest the effect was less dramatic for services. The percentage of service exporting firms that reported exporting as normal, fell by 5 pps from 57% in mid-December’20 to 52% in mid-January’21 and by late-February had risen back to 57%. But the survey data are incomplete (e.g., does not include financial institutions) and lockdowns are muddying the statistical waters.

Downside surprise. The latest monthly US labour market report was disappointing. Witness the 266k increase in non-farm payrolls in April 2021, well below market expectations of 1 million. March’s employment data was also revised down. This data flies in the face of recent indicators of strong demand in spring 2021. Perhaps it is indicative of supply-side constraints, evident from recent reports of labour shortages in some sectors of the US economy. It is premature to draw conclusions at this juncture. The upshot is that the Federal Reserve is unlikely to be in a hurry to taper QE let alone raise official interest rates.

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