Chief Economist’s Weekly Briefing – ‘Promising Signs’

Against the backdrop of threats of ‘sausage wars’, the latest economic data is encouraging. This signals not only an economic rebound but also the success of the vaccination roll-out and support policies from the year gone by. Can a delay to full reopening turn the tide?  Most think not. But one thing to watch our for is whether some households turn a little more cautious as the rate of infections rises.  

Convalescence. UK GDP grew by 2.3% in April 2021, the fastest monthly growth since July 2020’s rapid bounce-back of 7.3%. GDP is still 3.7% below the pre-pandemic level (huge, in normal times) but is now 1.2% above its initial recovery peak in October 2020. Not bad when restrictions were only lifted on 12 April. Re-opening meant a strong rebound in retail sales with consumer-facing services rising 13%. Meanwhile, planned maintenance closures meant the production side fell 1.3%. That should reverse. Supply-chain disruptions showed up, impacting car factory output. gain, hopefully temporary.

Record breakers. The US, UK and the Republic of Ireland’s composite PMIs all posted record highs for output growth in May. It was a similar story across the UK regions too. Output rose sharply in every region, with many seeing record growth. The North West topped the regional growth rankings, registering an all-time-high of 66.4 with the West Midlands and Wales (both 65.5) hot on its heels. Northern Ireland (58.7) was bottom of the output growth rankings but topped the table for input cost and output price inflation. Eight of the twelve UK regions raised the prices of their goods and services at record rates in May.

High fives.  Local private sector output may not have grown at a record rate in May, but it still marked the joint-highest reading in almost seven years. Manufacturing, retail, services and construction all saw business activity increase last month. New orders hit a 40-month high albeit this concealed divergence between domestic and export markets. The latter continued its slump despite the export climate indicator reaching a new high. Brexit paperwork is clearly a factor here. Encouragingly, the pick-up in demand led firms to increase staffing levels at a pace unsurpassed in 19 yearsThe outlook is improving too with firms the most optimistic in over three years. But political turbulence surrounding the NI Protocol and inflationary pressures could dent this improved sentiment.  

Up, up and away. And the recovery in UK economic activity shows no signs of reversing as Spring turns to Summer. On the contrary, the value of credit/debit card purchases exceeded its February 2020 level in the week to 3rd June (+3%), with both work-related and social spending hitting new post-pandemic highs. The pickup in expenditure is mirrored in the labour market.  Businesses are bringing back staff in their droves as activity rebounds. The share of the workforce on furlough fell to 7% (1.8 million) in May, while job adverts are now running at 129% of February 2020 levels.

Trade’s on. Total UK imports of goods increased by 4% during April, driven mainly by increases in imports from non-EU countries (4.5%). Indeed, for the fourth month in a row the UK imported more from outside the EU than from the EU. That’s been very rare over the past 25 years. Meanwhile total exports of goods fell slightly (-0.6%) after two consecutive months of growth, driven by a decrease in exports to non-EU countries (-2.9%) partly offset by an increase in exports to the EU (2%). That said, UK exports to the EU are still around 9% below 2019’s average level. Isolating trends from the pandemic recovery and booming global trade is hard. But there are early indications of changing trade patterns.

Galloping. May’s survey from the Royal Institution of Chartered Surveyors shows that the gap between demand for UK housing and its supply continued to widen. While new buyer enquiries dropped to +32 in May (from +45 in April), the balance of new sale instructions, a measure of supply, declined notably to -23 (vs -4 in April). Not surprisingly, the net balance of surveyors reporting that house prices rose over the last three months increased by +83 (vs +75 in April). Strong annual growth in house prices look set to continue near-term. However, the broad view remains a cool down later in the year. 

Mismatch.  Local surveyors were unanimous that residential property prices rose in May. That’s according to the latest RICS and Ulster Bank NI Residential Market Survey. Arguably the proverbial dogs in the street could have confirmed this.  While there is no shortage of buyer demand, the flow of properties onto the market has lagged behind. Three-quarters of surveyors reported a rise in new buyer enquiries in May. That was more than three times the number signalling an increase in new instructions to sell. This mismatch means prices are  anticipated to head north for a while yet. Some 63% of RICS surveyors expect further price rises in the three months to August. That’s down from 77% last month.

Encouraging, but. The UK is swiftly getting closer to achieving herd immunity. ONS modelled figures show that an estimated 8 in 10 adults would have tested positive for antibodies against coronavirus in the week beginning 17 May. While previous infection has a role to play, the UK’s hugely successful vaccination sits behind this progress. 80% of UK’s adults have now received at least one does and c.60% their second. However, challenges remain. The delta variant has now become the dominant strain and is rapidly pushing up cases. Further, vaccine hesitancy remains stubbornly high among some ethnic minority groups.

Aches and ale-ments. Among the anguish of the most Covid-affected sectors, pubs rank highly. Many a cosy local, hipster pop-up, or neon high-street mega-pub have been shut for months on end. It shows. In February, just 1% of UKlandlords had high confidence their business would survive three months (and >80% of staff were on furlough, vs <20% for other sectors). It’s since risen to 24% but remains fragile. It also illustrates what’s at stake if la grande opening on June 21st is delayed. Many pubs were hanging by a thread before Covid. The virus will have cut thousands more. 

Not a bug, but a feature. The US consumer price index increased by 5% y/y in May, the highest since Aug ’08 and grist to the mill of the inflationistas. But take a look to underneath and the surge was partly due to base effects along with the escalated price of flights, household furnishings and rental cars. Granted, inflation could be stickier as demand increases with the economy reopening, alongside supply side bottlenecks. But the Fed is still firm on its stance that this is just transitory and higher inflation is to be expected as the economy recovers in the coming months.

Premature. The clear message from ECB president Lagarde’s latest monthly press conference was that it is too early to talk of tapering the ECB’s balance sheet. The ECB’s focus is preventing damage to the fledgling Euro area upturn. Ms Lagarde stressed that the recent rise in Euro area inflation was due to base effects, higher energy prices and transitory factors, which should fade in H2 2021. Latest quarterly ECB staff forecasts revealed a small upward revision for Euro area inflation for 2021 (1.5% to 1.9%) and 2022 (1.2% to 1.5%), but no change for 2023 (1.4%). ECB bond buying looks set to continue apace for some time.

Leave a Reply