Chief Economist’s Weekly Briefing – Fragile

The revision to Q2 GDP indicated that the economy is closer to its pre-pandemic level of output than previously thought. So, while the list of challenges to the recovery mounts – labour, fuel and components shortages, high inflation, soaring energy prices and rising taxes – at least we know the economy faces them with good momentum.

Close the gap. A new estimate of H1’s economic growth in the UK showed that we’d closed the gap to pre-pandemic output by more than previously thought. The latest view now shows just a 1.3% shortfall compared to February 2020, making it highly likely that this benchmark will be surpassed in the final months of 2021. Households’ finances are set to be hit by headwinds – gas price rises, Universal Credit cuts and the end of furlough. The good news is that with a saving rate of 11.7% there is enough cushioning in the system. The problem is likely to be that those with the savings aren’t the same households that will feel the squeeze from rising prices, so the recovery could yet enter a much more uneven phase.

97%. The nearest indicator Northern Ireland has  to quarterly GDP – the NI Composite Economic Index – expanded at its second fastest pace on record in Q2 2021 (+3.1% q/q). Meanwhile the rebound relative to last year’s lockdown low was a record breaking 22.2% y/y. As a result, the index is just 0.1% below its pre-pandemic level of Q4 2019. That means the ‘V-shaped’ recovery is almost complete. While this improvement is to be welcomed the recovery is not quite as complete when you look at private sector output. 97% of the private sector’s post-pandemic slump in output has been recovered thus far with output 0.6% below Q4 2019.  Other milestones such as returning to pre-pandemic levels of debt and profitability will take even longer to achieve. 

Little appetite. UK individuals borrowed £1.2bn of consumer credit per month on average in the two years to February 2020. Cue the pandemic and for twelve of the thirteen months that followed consumer credit was negative as lockdown savings were used for debt repayment. Credit appetite has returned, to a degree, but remains modest with just £0.4bn in August. A shortage of stock has kept demand for car finance subdued. While unsecured consumer borrowing remains well below pre-pandemic levels the converse is true in the housing market. Almost 74,500 mortgages were approved in August which is 7,000 above the same month in 2019 but marked the lowest approvals in 13 months. A housing market cooldown is underway.

Priced out. House prices in rural and coastal areas are spiralling. In the year to July, house prices rose at three times the national rate in tourist hotspots like Conwy in North Wales (+25%), North Devon (+23%) and Richmondshire in the Yorkshire Dales (+21%). In Northern Ireland, the Causeway Coast & Glens (+16.9% y/y) was the top performer in Q2. Places like these are popular locations for second homes. They’re also attractive to a new breed of homeworkers seeking more space and less crowded surroundings. Many locals simply can’t compete. With the housing market increasingly out of reach for young and low paid workers, vacancies in the local tourism and hospitality sectors may continue going unfilled.

It’s over. Coronavirus Job Retention Scheme, or furlough, must be one of the most striking policy responses to the Covid pandemic. On September 30 the scheme, extended several times, drew to a close. One in four UK employees had been on furlough at some point during the last 18 months. Half of people on furlough were furloughed for more than three months and around a quarter for at least six months. Between 1.3 and 1.7 M people were still on furlough at the end of August. What will happen to those people now will to a large extend determine the course of recovery.

Flatlining. Consumer spending in the UK remained broadly unchanged between August and September. CHAPS card spending data flatlined at 93% of its February 2020 levels in the week to September 23, with weakness evident across all sub-categories. Social spending slowed as well; restaurant reservations were 23% above its pre-pandemic levels vs 56% at end of August. Retail footfall is also stuck in the slow gear. A whole host of factors is dampening consumer confidence – rising energy and fuel prices, less fiscal support, broadening of supply shortages and looming tax hikes. Firms’ activity took a hit. 20% of businesses reported a decrease in turnover, compared with normal expectations for this time of year.

Vigilant. BoE governor Andrew Bailey’s latest speech focused on the impact of supply-side constraints on the UK economy. UK growth has slowed whilst Inflation has risen. Mr Bailey reiterated that higher UK inflation should prove transitory. Much depends on the labour market. One scenario is that furloughed workers will be re-absorbed into their old jobs, and worker shortages persist, boosting wages amid excess vacancies. Alternatively, employers might be too optimistic about UK growth and delay hiring, resulting in an easing of current labour market tensions. Whichever scenario is forthcoming will be a crucial factor determining the timing of a potential rise in the UK official interest rates in the coming months.  

Slightly stronger. US real GDP increased at an annual rate of 6.7% in Q2 (up slightly from the previous estimate of 6.6%) vs 6.3% in Q1, reflecting the broader economic recovery and amidst reopening, supported by government stimulus payments. The strong showing reflected a solid rise in consumer spending, exports and private investment. Like the UK Q3 looks a bit more challenging given the spread of delta variant, supply chain disruptions, shortage of workers and the cooling housing market. At least data last week suggests the strong showing in equipment investment continued in Q3.

Unchanged. The CAIXIN Manufacturing PMI rose to 50.0 in September from 49.2 in August signalling that business conditions have remained unchanged following the contraction of August. The improved reading was driven by rise in total sales while the rate of decline in output eased. New export orders continued to decrease in September, signalling softer external demand. While raw material shortages continued to weigh on activity. A more downbeat picture emerged from the official manufacturing PMI, which dropped into contraction territory (49.6) for the first time since last year’s lockdown. And it’s the latter that’s probably more telling given the severe power shortages the country has faced in recent weeks.

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