Chief Economist’s Weekly Briefing – Hey, it’s complicated!

Data releases are sending out mixed signals to the Bank of England’s MPC. On the one hand, there is rising evidence of growth slowing in Q3 as consumers turned cautious and firms struggled with supply-side shortages. Yet the labour market continues to recover rapidly with any slack declining fast. The latter could push up wages for longer, risking a firming up inflation expectations.

Continued strength. The gradual reopening of the economy had a positive impact on an already resilient labour market. In the three months to June, UK unemployment decreased by 0.2 pp to 4.7%. Labour flow data shows that this was led by a record number of people moving from ‘unemployment’ to ‘employment’ in Q2, indicating the labour market slack is declining fast. Meanwhile, growth in average regular pay during the same period reached a bumper 7.4%, helped by temporary factors (though underlying wage pressure are slowly building). Vacancies reached record highs in May-Jul and are 168K more than their pre-pandemic level. The next test will come in September, when the furlough scheme is wound down.

Stickin’ out!  In a sign of just how strong the jobs market has grown, ever more parts of the UK now have more employees on company payrolls than before the pandemic.  As of July, the list includes the North East, North West, East Midlands and – cue drumroll – Northern Ireland.  The latter has not just succeeded in reversing job losses witnessed last year, but now boasts a weighty 1.3% more payroll employees than in February 2020.  At the other end of the spectrum, London still fares the worst of any region, with 3% (120,000) fewer payroll jobs than pre-pandemic. 

Pulling away.  July witnessed the largest monthly jump in Northern Ireland payrolls since the series began, taking the total number of employees to 762,596 – a fresh record high.  That is up 27,000 employees from November 2020’s pandemic low and 9,600 (+1.3%) above February 2020’s pre-pandemic high. But remember some of these employees aren’t doing any work and are on furlough and local self-employment has slumped to a 22.5-year low.  That explains why the number of hours worked in Northern Ireland in Q2 2021 is still some 5.5% below Q4 2019 levels. Only when this figure returns to its pre-pandemic level can we celebrate a recovery.

Back on track? Inflation exceeded analysts’ expectations in recent months but the UK’s CPI print for July came in weaker than anticipated. CPI inflation slowed from 2.5% y/y in June to the Bank of England’s target rate of 2.0% y/y.  Inflation eased across a range of goods and services but the return of the summer sales, put on hold last year, saw significant price discounting for clothing and footwear in July (-2% m/m). But second-hand car prices drove inflationary pressures in the opposite direction with prices up over 14% over the last year. July looks like a temporary dip with CPI set to resume its ascent towards 4% y/y later this year.  

Some slippage. UK retail sales volumes fell 2.5% in July. Multiple factors explain this dip. Food store volumes fell 1.5%, reflecting some normalisation after the boost caused by the Euro’20 football championship. Automotive fuel sales fell 2.9%, as heavy rains reduced traffic volumes in early July. But the most important factor remains the impact of rising covid cases in the first half of the month which turned households more cautious in their spending and in some cases more directly prevented them by forcing them into self-isolation. Despite this, high frequency data shows that measures of consumer spending have stabilised/increased since mid-July, reflecting the strength of consumer spending in the months ahead.

Ping Pong. Can you remember that bit of a flight, well after the steep incline of take-off and just before you level out at cruising altitude? Well that rising-but-nearly-stable feeling seems like a lot of economic activity just now. So, footfall in the UK rose by 2% in the week to the 14th, while dinner sittings were up 5% over roughly the same time. There were slightly more import-laden ships docking at ports. Yet, most other indicators, like online job adverts, motor traffic and flights were largely unchanged. So the seat belt light has pinged off, let hope other pings remain manageable too.

Swiftly rising. UK house prices increased by 13.2% in the year to June 2021, up from 10% in May. Homebuyers rushed to take advantage of the tax break that was beginning to taper off from June 30. But that was just one of the many reasons for the upsurge. The housing market is growing stronger by the day as housing preferences change on account of the pandemic. More and more people want to move out of the city centres and into the suburbs, making “Detached” homes (+5% yoy) the new favourite property type. The low rates and excess household savings are just buttressing.

AcceleratingNorthern Ireland’s Residential Property Price Index reported its ninth successive quarter of growth in Q2 2021 with prices rising by 2.9% quarter-on-quarter, taking the standardised price of a residential property to £153,449. The latter marked a 12.5-year high. Meanwhile the annual rate of property price inflation accelerated to 9% in Q2 2021 which is the fastest pace since Q4 2007.  Looking at property type and location, detached properties (+12% y/y) and the Causeway Coast & Glens (+16.9% y/y) recorded the strongest gains. Northern Ireland’s price rises are running ahead of the Republic of Ireland (+5.6% y/y) but below that of the UK (+10.9% y/y).

Pandemics are expensive. In terms of lives lost, health effects, grief, and anxiety. But they also have a more pecuniary price, due to lost output and incomes. Last financial year the UK government borrowed eye-watering £298bn or 14.2% of GDP. As the economy and government receipts recover and spending on support programs wind down, the level of borrowing is decreasing. In July government borrowing has reached £10.4bn; this was the second-highest July borrowing since monthly records began in 1993, but only half as much as in July 2020 and 50% lower than was forecast by the Office for Budget Responsibility (OBR) in March 2021. Things are improving, slowly.Split. July’s Federal Reserve minutes revealed “most participants judged that it would be appropriate to start reducing the pace of asset purchases this year”. However, “several others” favoured a delay in shrinking the Fed’s balance sheet to early 2022, signaling diverging opinions amongst Fed members regarding the timing of a tapering. The risk is that the recent rise in the Delta Covid19 variant delays a Fed tapering particularly given latest weak US data. Witness disappointing US retail sales in July and a sharp fall in August’s Michigan consumer confidence index. Even if a Fed tapering occurs before year-end a rise in official US interest rates is unlikely anytime soon.

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