Chief Economist’s Weekly Briefing – Spending Spree

The Chancellor revealed that the UK economy has turned out better than expected in recent months. Cue some meThe Chancellor revealed that the UK economy has turned out better than expected in recent months. Cue some measures to support the lower paid amidst a cost of living crisis. Welcome support that provides additional confidence around the recovery. But what about measures to support the path to net zero?

Spend it like Sunak. Stronger economic growth and higher taxes gave the Chancellor a chance to spend in last week’s Budget. Annual departmental budgets will now be around £30bn more than planned, meaning every area gets a real terms increase. Chief beneficiary is health, which is grappling with Covid-induced backlogs and the extra pressures of an ageing population. So much so that it will account for 40% of the Government’s day-to-day spending by 2024. Stormont is set to receive an additional £1.6bn for spending though that figure is challenged by NI’s Finance Minister as being over-inflated. For many people it will be the benefits and wage changes that will have the most direct impact. Lower income working households will be helped by a 6.6% rise in the living wage and a lower taper rate to Universal Credit; a useful boost as inflation climbs higher. The total omission of climate from the hour-long speech disappointed many. Cancelling fuel duty hikes and cutting taxes on domestic flights felt at odds with calls for bold climate action heading into COP.

Improvement. Cumulative UK government borrowing over the period FY22/23 to FY25/26 is forecast to be £141bn lower than in March 2021 driven by higher forecasted UK growth and lower than expected medium-term “scarring” from the pandemic. Public sector debt as a percentage of GDP is projected to decline in the third year of the fiscal forecast (FY24/25), meeting one of the Chancellor’s new fiscal rules (Charter for Fiscal Responsibility). Other conditions include balancing the budget (excluding investment), again by the third year, ensuring a limit on public sector investment of 3% of GDP over a rolling five-year period and a cap on total spending on welfare. Lingering UK growth risks suggest little wriggle room for the Chancellor on the fiscal front in coming years.

Still saving. Perhaps it’s anticipation of rainy days ahead. More likely, it’s lingering concerns over the economy and the outlook for personal finances driving cautious consumer behaviour. Either way, UK households continue saving twice what they did pre-pandemic, depositing £9.4bn into bank accounts in September. Admittedly credit card balances did rise at a decent clip, up £600m in a month, but individuals also repaid £400m net in personal loans and car finance. With inflation on the rise, a financial cushion may prove handy. But ultimately, the recovery will be weaker unless we’re prepared to spend a greater share of our incomes.

Pinch point. The Budget presented a somewhat challenging economic backdrop, albeit one significantly improved from the version offered half a year ago. And the near-time UK indicators largely share this sentiment. So, activity as measured by traffic flows, dinner reservations, card spending and online job adverts, have all plateaued. Meanwhile average gas prices remain elevated – although they are at least heading in the right direction, having dropped a modest 2% on the week. Household budgets are being squeezed, and despite a sprinkling of Sunak succour for lower paid workers, most are set for a deeper pinch this winter.

Mind the gap. The UK gender pay gap has fallen approximately a quarter over the last decade. In April 2021 among full time employees, it stood at 7.9% (9.0% in April 2019). It was much higher for employees aged 40 and over and for higher earners. The largest improvement over the past two years was seen among managers, directors and senior official’s occupation group, in particular for those aged 50 and over. The pay gap was higher in every English region than in Wales, Scotland, and Northern Ireland. In Northern Ireland the pay gap was negative, affected by a higher proportion of women working in the public sector.

Positive Electrical Future. As the world tries to eliminate the use of fossil fuels, it’s good news to know that more than half of young drivers in the UK aim to switch to all-electric vehicles within the next decade. Transport is responsible for 27% of greenhouse gas emissions, and 97% of registered vehicles are powered by petrol or diesel. At the moment, electric cars are 30% costlier than the average sale price of petrol cars and recharging the vehicle remains a struggle due to lack of charging points. However, by 2030, they are expected to be 13% cheaper and the Net Zero Strategy aims to spend £620 million in grants for electric vehicle and supporting infrastructure. The outlook is green.

Push back. Eurozone inflation looks set to approach 4%, overshooting the target of 2%. Higher energy prices, a global demand-supply imbalance, and one-off base effects are the key drivers. ECB President, Christine Lagarde, while acknowledging the same, pushed back ON any possibility of a rate hike in 2022, also stating that the Bank will wind down its pandemic bond-buying program in the 2022 Q1. While central banks around the world are signalling tighter policy amid rising prices, Lagarde firmly maintains that inflation is temporary, so a policy response would be premature. Will this response, that comes after a lot of “soul-searching”, help the bloc? One can only wait-and-see.

Slowdown. US GDP in Q3 increased by 2% at an annualized rate vs. 6.7% in Q2. The disappointing figure is due to a decline in personal consumption growth which was up by just 1.6% for Q3 after a 12% rise in Q2. The resurgence of Covid cases and supply bottlenecks hitting businesses combined with rising inflation are to blame. Chip shortages also depressed auto sales over the last few months. Other components of GDP showing weakness were residential fixed investment, exports, and federal spending. Overall, little to cheer about. The good news Q4 is looking like a very different story. High frequency data suggests a pick-up in consumer spending as Covid has receded, and an improving labour market too.

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