Chief Economist’s Weekly Briefing – Bumpy Road

Surging energy costs, supply chain disruptions and labour shortages remain high up the agenda. A higher and longer version of “transitory” inflation looks to be here. Cue the inevitable squeeze on disposable incomes.

Not good. How have UK businesses been doing over the last two weeks? Well, higher prices, labour shortages and supply chain disruptions are on the menu as shown by survey data from ONS. The usage of the furlough scheme fell only marginally in September to 5%. Those workers should help alleviate some of the labour shortages in coming months – 41% of businesses with 10 or more employees are reporting difficulties in filling vacancies. Nearly 30% of trading businesses reported a rise in prices of goods and services, especially for manufacturing and construction. The latter has seen increasing input prices since May 2021. On the trade side, 22% of businesses reported lack of lorry drivers as major importing challenge.

Your ride is *not* here. The shortage of UK hauliers propelled online job adverts in transport, logistics and warehousing to their highest level (+378% vs February 2020 and +7pp over the year). Meanwhile spending on debit and credit card purchases increased by 5pp (vs last week) owing primarily to a huge spike in spending on “work-related” (road fuel spending) and “staple” spending categories. In fact, “work-related” spending was above its average pre-pandemic levels (+158% vs Feb 2020) as drivers rushed to fill up vehicles amidst widespread fuel shortages.

Charging ahead. The recovery in new car sales began in the second half of last year but supply chain disruptions, particularly the shortage of semiconductors, has acted as a handbrake. UK new car registrations fell by 34%y/y (NI -31% y/y) last month marking the weakest September since way back in 1988. Overall new car sales for UK (& NI) 2021 may end up as dismal as 2020. But, evidence of the climate transition is to be found amongst the disappointing news. New battery electric vehicles (BEVs) posted their best month of sales on record with a market share of over 15% in September. Looking at the year-to-date, sales of BEVs have jumped by 88%y/y and now account for 1 in 10 of all new cars. That’s a larger market share than diesel!

Animal spirit. Despite a catastrophic year for the UK economy, during the 12 months to March 2021 the number of businesses operating in the UK increased by 0.6% to 2.77 million. The decoupling of business and economic growth was likely aided by government support schemes preventing business deaths. The professional, scientific, and technical industry accounted for the largest number of businesses (16.4%). Transport and storage exhibited the highest growth rate for the second year running, at least partially due to the increased demand for online shopping during the pandemic. Growth was broad based in geographic terms (NI = +2.0% y/y), too, with only Scotland and West Midlands experiencing a small contraction.

Searching. As the Bank of England’s Financial Policy Committee surveys the financial stability landscape a key question is how the pandemic impacted corporate sector vulnerabilities. While aggregate debt has increased only relatively modestly, there are big distributional differences. Debt amongst SMEs has risen 25%, compared to just 2% amongst large corporates. That suggests the number of vulnerable businesses has likely increased. So as pillars of support, such as restrictions on winding up orders are withdrawn, there just might be a tick-up in business insolvencies, which are currently at historic lows. 

“No economy is an island”. According to new research from the Bank of England, with developments overseas estimated to account for around half of the variation in UK economic activity from 1997 to 2019. The recent news surrounding China’s property giant ‘Evergrande’, and its potential to be the catalyst for a wider crisis, is one to keep an eye on. Acknowledging that identifying how these risks crystallise is difficult, comfort can be drawn from the interim results of the Bank’s stress test run earlier this year, which indicate that the UK banking system is resilient to the direct effects of a severe downturn in China.

Underwhelming. US non-farm payrolls posted a 194k increase in September 2021, below market expectations. However, July and August employment data were revised higher by a sizeable 169k, signaling a favourable hiring trend in Q3 2021. Employment in leisure and hospitality was modest, up 74k, after only 38k in August, suggesting that that Delta variant continued to impact hiring. On a positive note, the unemployment rate dropped 0.4% to 4.8% whilst average hourly earnings posted a decent 0.6% m/m increase last month, hinting at a tighter labour market. Against this backdrop the Federal Reserve should announce QE tapering at its next meeting,  but talk of higher US rates is premature.

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