Chief Economist’s Weekly Briefing – Enter Uncertainty

Amid building global inflationary pressures came a warning from the IMF – central banks must remain vigilant. Right on cue Governor Bailey gave a very strong signal the Bank of England might raise rates as soon as December, citing increasing concerns about medium-term inflation and inflation expectations.

Touching distance. After a lacklustre July performance, the UK economy returned to a solid growth footing in August. GDP rose by 0.4% on the month, powered by ‘staycation’ spending. Output at restaurants and bars was up 6%; accommodation activities jumped 23%; and the entertainment sector grew a staggering 25%. All told, GDP is now just a whisker away from pre-covid levels (-0.8% vs. February 2020). That’s a milestone we should pass around the turn of the year, even assuming higher inflation, reduced government support and supply shortages take a toll on the pace of growth.

Stellar. The UK labour market continued its resilient performance with the unemployment rate easing to ‘merely’ 4.5% in August, compared to a peak of 5.2% last year. Employment rose by 0.7% (235k) compared to previous three months – a very strong pace. And average weekly earnings growth, ex-furlough, increased to 4.1%-5.6%, compared to 3.6%-5.1% in July. An open and closed case on the need for rate hikes, surely? Things are rarely that straightforward in economics. Other measures of pay growth aren’t as robust. XpertHR’s median pay-hike measure was just at 2% in August. The headline figures are likely propped up by factors such as a decline in self-employment, low participation rate and underemployment. 

Déjà vu? The latest batch of labour market data from NISRA had a familiar ring to them. Despite the end of the furlough scheme looming, proposed redundancies in Northern Ireland remained muted in September. There appears to be no shortage of jobs with the number on the local payrolls hitting another record high 765,600 last month. Eighteen months ago a double-digit unemployment rate looked to be a ‘slam dunk’. Unemployment may be on the rise but at 4.1% for the three months to August it isn’t at a rate to be worried about. Instead rates of pay will move centre stage in the evolving cost of living crisis. This will affect those in work as well as the unemployed.

Way off. A swift return to the pre-pandemic order does not appear to be on the cards where international trade is concerned. UK exporters have lost market share. Whilst other advanced economies are already exporting more than in 2019, the UK exported 12% fewer goods in the first half of 2021. Total exports fell 5% in August and business surveys suggest that trend continued in September. CSO data reveals GB exports to the RoI (Jan-Aug) fell by 37% relative to 2019 while goods going the opposite way rose by 4%. But it is North-South trade that has boomed above pre-pandemic levels. Exports from South to North have increased by 35% between 2019 (Jan-Aug) and 2021 (Jan-Aug). Goods moving the other way (N>S) have jumped by 54%.

Very, very vigilant. That was the message from the IMF Chief Economist to central banks last week as inflationary risks build. While higher prices brought by energy price shocks or supply shortages should be generally ignored, if households think those prices are set to linger, central banks should tighten in response. Away from the inflation risk the Fund acknowledged a recent loss of momentum in the recovery. But it’s still firmly expecting it to continue, leaving its forecasts little changed from July. It expects the UK to grow 5% next year, with France, Spain and Italy similarly placed.

Bouncing back. As the UK economy reopened over the summer, so has borrowers’ appetite for credit. Lenders reported both higher demand for, and supply of, unsecured credit to households in the BoE Q3 survey. Unsecured borrowing has been falling throughout most of the pandemic, driven by weaker consumer spending and high saving rates amongst many households, so the next few months might see that tide start to turn. The change is happening in the opposite direction with mortgages. Whilst lenders are reporting greater supply of products, borrowers aren’t quite so keen now that the stamp duty holiday has expired. Instead, there’s an expectation that remortgaging might pick up, especially now that the MPC is talking up the prospect of rate rises.

Covid plus others. September’s BoE Decision Maker Panel survey shows that businesses expect a reduced impact of Covid on sales (-8% in Q3 to -6% in Q4). In addition, the proportion of full-time furloughed employees fell to 1% (vs. 2% in August). More of us are returning to the office – the presence of workers on premises rose to 70% (vs. 66% last month). Despite the positives, businesses still describe the operating environment as one of constant uncertainty, and continue to point to the new trading relationship with the EU as a strong contributor.

Doing better. There were broad based improvements across many regions in the lastest PMI survey. Wales (57.1), the West Midlands, (56.3), Scotland (56.1) and London (55.9) were the areas with the biggest surge in September. Northern Ireland saw the pace of growth in output and employment growth quicken too. Other areas saw a loss of momentum. The North East (51) remained at the bottom of the regional rankings. Inflationary pressures, supply chain disruptions and labour shortages continue to put upward pressure on prices and costs. To underline the point, seven of 12 regions reported a record high output price gauge. Northern Ireland continues to top the regional rankings for inflationary pressures.

The lunch economy. The mobilisation of the commuter workforce for the vital endeavour of saving various parts of the consumer-facing service landscape is partly working. Take Pret a Manger. Regionally, only in the City and in Scotland were sales for the sandwich provider lower than in January 2020. It seems lunch is not for wimps after all. More seriously, and strikingly, high-street footfall rose 7% in early October. Signs that behaviour’s edging closer (but not returning) to that seen pre-pandemic. That gap is still large in air travel though. Flights remain just 56% of the level seen in 2019, while Pret’s takings at London’s airports are down 25%.

Upward. US consumer prices increased 0.4% in September, following an increase of 0.3% in August. While compared to last year prices were up 5.4%. American households are now paying more for food, fuel, and rents. Food at home index increased 1.2%, while energy increased 1.3%. But rents is the more worrying one, as it hints that price pressures are broadening out from areas associated with reopening. Offsetting the rises in those areas were declines in the price indices for airline fares, apparel and used cars. Some of those will reverse as the reduced Covid caseloads lead to more travel. All in all, plenty are starting to have second thoughts over the ‘transitory’ state of inflation.

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