Chief Economist’s Weekly Briefing – Cautious

While the data on economic activity continue to look positive, the overall mood is that of cautious optimism. Cases are on the rise in various parts of the world. In the UK the wall of vaccines is so far proving effective against a rapidly building third wave.

Yellow transportation sign post with caution word on blue sky with cloud background and have copy space

Prudent. May’s money and credit data shows that UK households and firms are still cautious in their spending. Businesses made a net repayment of bank loans worth £2.3bn, following a larger £6bn repayment in April. This perhaps suggests a desire to deleverage when the going is good rather than investing into the recovery. Further, firms’ deposits picked up after a dip in April. Similarly, households continued to build their deposits, rising by £7bn, an increase higher than the £5bn average observed between 2018 and 2019. On the borrowing front, they hit the pause button on unsecured deleveraging for the first time since September last year.

Shift-down. Business survey data from the Bank of England revealed some softening in UK sentiment around the outlook following the spread of Delta variant. Relative to what otherwise would have happened absent Covid, sales are expected to be 5% lower at the end of year year and business investment 7% lower. The corresponding figures last month were 2% and 3%. However, the labour market outlook was similar and proportion of employees on furlough fell from 6% to 3%. While Covid-related uncertainty continues to decline, almost a quarter of respondents think it won’t disappear before 2023.

Steadying. After a modest decline at the start of June, fast-moving indicators for the UK economy, notably on consumer spending, are showing signs of stabilisation. CHAPS debit & credit card transaction data rose by 2% in the week to 24 June, while retail footfall was broadly unchanged. More firms are getting back to down to business. The share of businesses trading rose to 88% in late June’21, the highest since estimates began in June ‘20. This has contributed to a strengthening labour market. Workers on furlough fell to an estimated 1.5mn and job adverts are 30% above their pre-pandemic levels.

Recovering, not recovered. We’ve all read the stories, restaurants that can’t get chefs, bars that can’t get folk in to pull pints. Staff shortages are a feature for many as the economy reopens. Does it speak to a wider issue of a tight labour market? We’re certainly not there, not yet at least. As the Resolution Foundation points out, a tight labour market means we would all be doing lots of work. But total hours worked are still down 5% on pre-crisis. While the ‘Covid employment gap’ – made up of furloughed staff, plus the fall in employees and self-employed workers since the start of the pandemic – still numbered around.2.3m in early June. The labour market is healing, and quickly. But there’s plenty distance left to run.

Jab, Jab, Jab, Punch. And punching it away are the people of the UK as more and more (96%, ONS Survey, 26th May-20th Jun 2021) have a positive sentiment towards a coronavirus vaccine. But there still are pockets of vaccine related skepticism, most notably among younger age groups – 14% of those aged 16-17 reported vaccine hesitancy. Further, vaccine hesitancy remained high for deprived areas (8%) as well as ethnic minorities (Black adults – 18%), a gap the UK is still struggling to close since the start of the vaccination programme.

Reprise. As the post lockdown bounce continues attention turns to what lies on the other side as we normalise. It seems a lifetime ago but before Covid arrived estimates of the UK’s underlying growth were being pared. Long-standing productivity challenges were increasingly focusing minds. According to the governor of the Bank of England we’re set to revert back to those low underlying rates of growth that have characterised the UK since the financial crisis. That’s not inevitable. And there are encouraging hints in the data. Investment in intellectual property has held up better than other types of investment, supporting the view that Covid has accelerated the digital transition. That will be a key plank in the UK’s productivity resurgence, if there is to be one.

Little by little.  Another month, another reduction in the Euro Area headline unemployment rate: down by 0.2%, to 7.9% in May. That 300,000 decline in the ranks of the jobless means unemployment in the Eurozone is now comfortably below its autumn peak (8.5%) and just 1% higher than its pre-pandemic low point (7.1%). A jobless recovery this is not. Alongside Austria and France, it was Greece that experienced the greatest drop in unemployment as the country geared-up for a limited tourist season. And for once it was young people, the under 25s, whose employment prospects experienced the biggest improvement in May. 

Mixed. US non-farm payrolls posted a 850k increase in June, above market expectations and the largest monthly gain since August 2020. The main driver of higher US employment last month was accommodation and leisure, largely reflecting the continued gradual re-opening of the US economy, up 343k. Retail added 63k. The unemployment rate ticked higher 0.1% to 5.9% last month, on increased household unemployment. Ongoing labour shortages are boosting wage growth. In particular leisure and accommodation saw a 7.1% y/y increase in average earnings in June. Still, the Federal Reserve appears in no rush to hike official US rates given its view that higher US inflation is “transitory”.

Dented. Virus outbreaks across Asia are hampering the recovery. Malaysia and Vietnam saw sharp falls in their manufacturing PMIs during June, showing the risk still posed by the virus and likely contributing to continuing global supply-chain disruptions. China’s manufacturing PMI held broadly steady at 50.9. But the services component fell almost two points as a virus outbreak hurt travel-related and high-contact sectors. There was consolation with continued strength in the construction sector PMI, supported by government-led investment.

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