Chief Economist’s Weekly Briefing – Ravin’ about it

The UK economy turned in a solid performance on the eve of Omicron, with GDP surpassing its pre-pandemic level by 0.7% in November. Meanwhile the Omicron wave is receding, with signs that infections and hospital admissions have peaked. But challenges await. Inflation in the US is at its highest in four decades, with our own multi-decade high soon to come if forecasts are to be believed. A 6% rate would be the highest since the early 1990s.

A long, long time ago, in a pre-Omicron world…the economic recovery was doing rather well. The economy grew 0.9% in November, the strongest pace of growth since June, which catapulted output beyond its pre-Covid level. And it was broad-based. Professional, scientific & technical, a sector similar in size to finance & insurance, grew 2.5%, and was the main contributor to November’s growth in services. Supply issues in construction and manufacturing eased, unlocking the best showing in those sectors since March. Consumer-facing services continued their recovery, with a return to work helping transport along. Good momentum in the run up to December makes a decent case for a robust post-Omicron bounce.

Weak. But the good news didn’t extend to export growth. Exports remained broadly flat and given the stronger recovery visible in exports across advanced economies it points to UK exporters losing market share. Total exports of goods (excluding precious metals) contracted by 1% in November and they still were 11% below their 2018 average level. Goods imports rose by almost 5% in November, especially from non-EU countries (5.2%) with the gap between EU and non-EU imports now at its widest point in the past year. Looking ahead, even as Omicron subsides here its impact will likely continue to be felt in the trade statistics via disrupted supply chains and dampened external demand.  

A poor start. More recent data show that the economy’s a little weak. Eating out, shopping, spending and traffic all fell in early January following the Omicron wave. As did online job adverts, by 4%. About 3% of the workforce were off sick, the highest since records started in June. It’s 7% for service jobs that include hairdressers and beauticians. The good news is that wholesale gas prices are the lowest since November. And it seems the item the nation’s most short of is paracetamol. And yet we have an abundance of beer. A rare example in economics of two goods being both near substitutes and complementary!

Two directions. Demand for secured lending, such as new home purchases, fell in Q4 2021 despite an increase in credit availability and a relaxation of lending criteria. According to the Bank of England’s Credit Conditions Survey lenders expect this trend to continue in Q1 2022. Re-mortgaging was one area that bucked this wider trend with demand increasing strongly for the third successive quarter, as borrowers sought to avail of very low mortgage rates. Mortgage demand may be cooling but borrowers are increasingly turning to credit cards instead. During 2020 consumers shunned their plastic but demand for credit card debt has surged since Q2-21 with further growth expected in Q1 2022 as the incomes squeeze bites.

Demography is destiny. The UK population is growing, ageing, and becoming more ethnically diverse – these are the conclusions of the new population projections from the Office for National Statistics. Over the next decade the population is projected to rise by 2.1 million to 69.2 million (+3.2%). And there are large regional disparities: England’s population is projected to grow by 3.5%, Wales’ by 2.6%, Northern Ireland’s by 2.0%, and Scotland’s by 0.3%. The share of population aged 85+ is projected to increase from 2.5% in 2020 to 4.5% in 2045. Deaths are projected to be higher than births starting from 2025, thus population growth will rely on positive net migration (+205K per year).

Healed. The Eurozone’s labour market recovery edged closer to a major milestone in November, as the unemployment rate fell to within a whisker of its pre-pandemic low. At 7.2% there are still 11.8 million people looking for work across the bloc, but that’s 1.4 million fewer than a year earlier. Greece and Spain are amongst the countries who have seen the biggest falls, although their rates of joblessness remain stubbornly high. Germany and the Netherlands have also seen very strong jobs recoveries, pushing their unemployment rates down to 3.2% and 2.7% respectively. Yet progress in Italy has been slower with unemployment still above 9%.

Still soaring. In contrast with softer inflation in China, US inflation rose by 7% in 2021, the highest in almost four decades. And it’s definitely not just headline figures. The core measure of inflation clocked in at 5.5%, the highest since 1991, driven by prices of shelter and used vehicles. On a monthly basis core prices rose 0.6% after gaining 0.5% in November. In addition to the supply chain woes affecting prices of goods such as apparel and household supplies, there was a healthy 2.7% increase in airline fares too. With the unemployment rate under 4% and wage growth relatively healthy, the inflation figures provide further impetus to the Fed to tighten policy.

Past the peak? Chinese Producer Price Inflation (PPI) dipped once again in December: down 2.6ppts on the month, to 10.3%. That’s welcome news. After all, rising goods prices have been a key driver of global inflationary pressures recently and China is the world’s manufacturing powerhouse. With energy and raw materials cost pressures now moderating, the downward trend in PPI looks likely to continue. Export prices should benefit in due course. And with CPI falling to just 1.5%, Chinese authorities may be emboldened to stimulate the domestic economy by loosening monetary policy further over the coming weeks.

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