Chief Economist’s Weekly Briefing – Wind Down

Covid-19 cases are on the rise again, especially in Scotland, where schools re-started three weeks ago. More data confirming a degree of caution set in amongst consumers mid-summer – UK net consumer credit growth dropped to zero in July and the savings rate is still unusually high. Meanwhile labour shortages appear to be intensifying.

Still up there. One of the key pieces in the recovery jigsaw is a normalisation in our savings habits. They’ve been elevated since the pandemic began, and that ‘excess’ now runs to some £180bn. UK households were still at it in July, squirreling away cash at a rate well above pre-Covid levels. Fears over the new wave likely prevented some spending from taking place. Concerns are mounting that it will persist through the autumn. Meanwhile, mortgage approvals fell back from June. Unsurprising given the stamp duty cut became less generous. But at 75k the number was still well above pre-Covid levels.

Ups and downs. Some notable changes in the UK’s weekly real time indicators. As far as UK flights are concerned the glass is either half-full or half-empty. Despite a 5% weekly rise in flight numbers, marking the best seven-days since late-March 2020, flights are only half (51%) of the equivalent week in 2019. The number of online job vacancies eased alongside credit and debit card spending. But the Bank Holiday week saw a big 22% increase in those eating out signalling the best week since the late-May 2021 (another Bank Holiday week). Retail footfall jumped by a more modest 5% but remains 84% of pre-pandemic levels.

In good spirits. The pandemic triggered significant change in consumer and business behaviours. But what about entrepreneurial attitudes? NatWest’s UK Global Entrepreneurship Monitor reported a fall in total entrepreneurial activity in 2020. Lockdowns curbed economic activity but failed to dent the UK’s underlying spirit of enterprise. Encouragingly, more people expressed the intention of starting a business in 2020 than in previous years, up from 11% in 2019 to 16.2%. Northern Ireland’s figure (19.5%) was even higher exceeding Germany & the US! Meanwhile the share of those agreeing that starting a business is a good career choice jumped from 58% in 2019 to 75% last year. These attitudes bode well for the future of enterprise.

Nurture not nature. While’s there’s much relief that the feared explosion in UK unemployment never materialised, how unusual was ‘the British experience’? Not very it turns out, with the unemployment rate taking a near identical path among our nearest neighbours in the euro area (albeit they start and end in slightly different places). So, after rising from 7.4% in Feb 2020 to peak at 8.6% this time last year, the euro area unemployment rate fell to 7.6% in July, a whisker or two above the pre-pandemic rate. Not bad.

De-base effects. Eurozone inflation leapt to its highest level in nearly a decade last month as the economy recovered from the pandemic. Annual inflation hit 3% in August, a steep rise on 2.2% recorded in July and just -0.3% at the turn of the year. Rising energy costs are a key contributor, with energy inflation now topping 15%. Goods price-rises also accelerated last month. Both have been pushed higher by one-off ‘base effects’ such as the ending of a temporary VAT cut in Germany. Services inflation is a meagre 1.1%, so the ECB may resist pressure to end its bond-buying programme for now.

Boiling. The US housing market is red-hot! The Case-Shiller HPI rose 18.6% from June 2020, the biggest YoY price growth in more than 30 years, and the 3rd consecutive month of record gains. Reasons include low interest rates and high demand for more spacious, suburban dwellings fuelled by working from home during the pandemic. This strong demand, coupled with tight inventory, rising lumber costs and labour and material shortages, has pushed home prices to new highs.

Soft. US non-farm payrolls posted a 235k increase in August 2021, well below market expectations. July’s data, however, was marked higher. The monthly average rise in jobs over the three months to August was a healthy 750k. Sector-wise hiring in leisure and hospitality dried up in August following an average 350k increase in the previous six months, largely reflecting the adverse impact of the recent sharp rise in the Delta Covid19 variant. The unemployment rate dropped 0.2% to 5.2% last month whilst average hourly earnings registered a healthy 0.6% MoM rise in August, pushing the annual rate up to 4.3% (4.1% YoY in July). Against this backdrop the Fed is likely to taper QE later rather than sooner.

Deteriorating: China’s Manufacturing PMI decreased further to 49.2 in August, crossing the 50-mark, which indicates contraction, for the first time since April 2020 (July’s figure was 50.3 from 51.3 in June). Services PMI plunged even further – to 46.7 from 54.9 in the previous month. This drop is attributed to the rise in Delta cases and supply chain disruptions. Higher transportation costs and raw material prices pushed up input prices. Due to Covid-19 pressures, the demand for new export orders has weakened in August while employment fell slightly.

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