Chief Economist’s Weekly Briefing – On Hold

The Bank of England left interest rates unchanged last week, surprising markets which expected a hike following “will have to act” comments last month. What is going up, in contrast, are commitments around decarbonisation. And hopefully there are more to come in the second week of COP26.

Misguided? Financial markets were convinced that the BoE’s MPC would raise rates for the first time since August 2018. But it was not to be. Despite a projected peak in CPI inflation of around 5% next April, the majority chose to sit on their hands in a 7-2 vote. Governor Bailey signalled that rate rises would be needed “over coming months” otherwise inflation will not return to target (2% y/y) until at least 2025. New BoE projections suggest slower growth alongside higher inflation relative to the August forecast. GDP growth is set to slow from 7% (previously 7.25%) in 2021 to 5% (previously 6%) and to 1.5% in 2023. Markets have pushed rate hike expectations back until February 2022 with rates hitting 1% by the end of the year.

Déjà vu New car sales used to be an indicator of consumer confidence. Nowadays they are a signal of supply chain disruption. UK dealers posted their worst October for sales since 1991 with new registrations down by one-quarter on last year. Year-to-date (Jan-Oct), UK sales are up almost 15% y/y but are still down by 29% relative to the corresponding period in 2019 (pre-pandemic). Sales in Northern Ireland are down by the same margin with dealers reporting their worst October on record. With just two months remaining, 2021 looks set for something similar to last year’s record low. A surge in new car sales, when it comes, will be a sign that the supply bottlenecks are easing.

COP-in or COP-out? Last week was very busy at the international climate summit COP26 in Glasgow. Countries were announcing new individual and collective decarbonisation plans. More than 40 countries announced a pledge to phase out coal. More than 100 countries have signed global methane pledge to reduce emissions by 30% by 2030 relative to 2020 levels. While more than 100 countries, accounting for 85% of the world’s forests, pledged to end deforestation by 2030. According to the International Energy Agency (IEA), the new commitments mean that the warming may be held to 1.8C vs 2.7C pre-COP26 announcements. But the hardest task of delivering on those pledges still lie ahead.

Not Available. In October 2021,14% of businesses reported a shortage of workers and one out of six businesses stated that they were unable to source goods and services, thereby resorting to finding alternatives. Of businesses that reported to be affected by supply chain issues, 63% experienced moderate or major disruption. Consequently, there were price increases for goods and services even more than the anticipated regular fluctuations. To conclude, empty shelves and higher price tags remain an ongoing issue waiting to be resolved.

Game on. The latest real time economic data read like a list of achievements in last week’s Budget speech. Number of job adverts: up (+6% last week to 42% more than in February 2020). Credit and debit card spending: up (+4ppts on the week, back to pre-pandemic levels). Retail footfall: up (+11% in late October to just one-tenth below the equivalent week of 2019).  And in welcome news for those facing higher energy bills, wholesale gas prices, while still an incredible 3x above spring levels, dipped by 11% in the last week of October. Don’t call time on the recovery just yet.

The Hobbit. As ‘Middle Earth’ aficionados will know, the book’s other title was ‘there and back again’. And so, as Eurozone unemployment rates return to their pre-pandemic levels, a small but significant chapter in their Covid drama concludes. September’s unemployment fell to 7.4% versus August’s 7.5%, matching February 2020’s figure. It’s a pattern shared across members. So, like the UK, the story may now shift to skills shortages, especially, perhaps, for lower skilled roles. And like Bilbo Baggins, workers may soon be empowered with skills they never knew they could possess – a more positive legacy of Covid.

Rebalancing Required. TheUS labour market moved back up through the gears in October with payrolls rising 530k, a sharp rise from the 312K in September. However, labour participation doesn’t seem to be improving. There are lots of jobs in the market and too few job seekers! (where have we heard that before?). Generous unemployment benefits and fear of the virus have kept some potential workers on the side-lines. The shortfall in employment points to an economy with some ground to make-up yet. However, with October marking the end of the unemployment benefits top-up, participation rates just might see a rebound.

Patience. As expected, the Federal Reserve officially announced QE tapering at its latest policy meeting. In mid-November 2021 the Fed will start lowering central bank purchases of US Treasuries and Mortgage-Backed Securities by $10bn and $5bn per month respectively. Fed Chair Jay Powell stated the pace of tapering could change, dependent on the trajectory of US inflation. This implies a potential acceleration of the pace of cutting QE if rising US inflation proved more persistent. Mr Powell reiterated patience on the timing of an official US rate increase until the US labour market reaches full employment. All in all, the Fed looks set to maintain an accommodating monetary stance for some time.

Downside. China’s PMIs reading reveal a slowdown amid a downturn in the property sector. The official NBS manufacturing PMI figure declined for a second consecutive month in October to 49.2. from 49.6 in September signalling a further contraction. The main driver for the slowdown was power and material shortages. Factories operated at a reduced capacity given electricity supply disruptions. The Caixin PMI survey again painted a more upbeat picture – with manufacturing version rising to 50.6 in October – its higher level since June – up from 50.0 in September, signalling stronger demand throughout October fuelled by rising new orders. Inflationary pressures intensified with average input prices for manufactures rising significantly. The services PMI activity also picked up in October and rose to 53.8 from 53.4 in the previous month.

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