Chief Economist’s Weekly Briefing – Higher & Higher

Annual inflation recorded its highest level for 30-years in December and is expected to rise further by the Spring, fuelling a cost-of-living crisis. This reading was the last before the next Monetary Policy Committee Meeting in February, suggesting that BoE will look to squeeze demand instead of supporting the economy through its temporary Omicron weakness. Yet the labour market remains healthy, despite Omicron and the end of furlough.

“Can’t nobody hold me down”. So asked Puff Daddy in 1997, the year that introduced the CPI, the inflation measure that reached a record high of 5.4% y/y in December. So, the cost-of-living crisis bites deeper and that’s before April’s NIC and energy prices rises. Superficially, it’s broad based, as in many are affected equally, hitting food and energy, which constitutes a large share of threadbare wallets, as well as transport and dining, proportionally more of fatter ones. But a key debate centred on the fact that lower income folk have fewer options, leading to privation and not substitution.

Too good to be true? Astoundingly, ending the furlough scheme had barely any impact on the smoking hot jobs market. At just 4.1% in November, the UK unemployment rate is almost back to its pre-COVID nadir. Redundancies are running at the lowest since records began in 1995. Job vacancies hit record highs and employment continues climbing: 180,000 employees were added to payrolls in December. Make no doubt about it, this is a tight labour market. The question now is: will that put upward pressure on wages? There’s little evidence of runaway pay growth to date but, as we all know, the world can change overnight.

And evenly spread. The labour market shrugged-off the impact of Omicron, with every region registering increases in payrolled employees in December. November’s employment rate was highest in the East of England at 79.4% and lowest in Northern Ireland at 70%, the latter showing deterioration of 1.1 ppts compared to the previous year. The East of England, Yorkshire and The Humber and East Midlands all saw record low unemployment rates. But not all is well. The total number of hours worked remain 3% below the pre-pandemic levels.

Winter wonderland. Northern Ireland’s headline labour market statistics are a veritable winter wonderland. Unemployment is at 3.1% – one of its lowest readings on record. Meanwhile the number of employees on local payrolls hit another record high in December and almost 20,000 above March 2020’s pre-pandemic high. No other UK region has witnessed a stronger rebound in payrolls growth. As far as signs of stress in the labour market are concerned, the most visible are skills shortages, rather than job losses. Redundancies in 2021 were a fraction of what they were in 2020 and the recruitment market is characterised by record numbers of job vacancies. 

It’s relative. In the long-term comparison of labour productivity between the G7 countries, the UK came out middling. Despite some uncertainty in measurement on hours worked, it looks like output per hour was lower in Japan, Canada, and Italy and higher in Germany, France, and the US. Productivity growth slowed down in all G7 countries after the Financial crisis. The UK’s output per hour growth between 1997 and 2007 was 1.9% per year –the second fastest after the US, but between 2009 and 2019, it was only 0.9% per year – the second slowest after Italy. Soon we will see how the pandemic changed this arithmetic.

Slow start. UK house prices increased by 10% over the year to November ‘21, after a mild downtick in October (9.8%), following the full reversal of the Stamp Duty Land Tax back to £125K at the end of Q3. Prices for detached homes continued to increase in November (13.9%) due to the persisting pandemic-fuelled demand for outdoor space. The emergence of Omicron, however, may have slowed temporarily the demand for housing. But this slowdown could be exacerbated by the hike in mortgage rates, which have continued their upward trajectory in December, reflecting the recent rise in risk-free rates and the first hike in Bank Rate to 0.25%, from 0.10%. This is expected to weigh in on the house price growth this year.

Softer. Monthly UK retail sales volumes fell by 3.7% in December, following earlier-than-usual Christmas shopping in November and then the Omicron wave. The contraction was the largest monthly fall since January ’21 following a strong growth in November (1.0%). The decline was driven by a 7.1% m/m drop in non-food sales, with clothing retailers (-8.0%) and department stores (-6.3%) suffering most. However, despite this backdrop retail sales remained 2.6% above their pre-COVID levels. Looking ahead, retail sales will likely flatline given the low levels of consumer confidence – GfK’s consumer confidence index fell to -19 in January, from -15 in December – as people worry about rising inflation and living costs.

Mixed Bag. The aggregate CHAPS-based indicator showed that UK spending on credit and debit cards in the seven days to January 13 moved up by 3 ppts, yet was 15% below its February 2020 levels. UK seated diners rose by 5 ppts, to 93% of the level in the equivalent week of 2020. Footfall also picked up to 79% of its level in the same week of 2019, but remains below pre-Omicron levels. However, consumer confidence has been slowly diminishing as 66% of adults reported their cost of living increased over the last month with rising food and fuel prices, plus energy bills too.

Split.While central banks in the West tighten policy, China’s central bank is loosening, last week cutting its key interest rate for the first time in two years. Why the divergence? Well, many had talked for years about an eventual reckoning for China’s bubble-like property sector. Now that the sector is slumping (real estate declined in both Q3 and Q4 last year, the first sequential drop since 2008) the need to support the economy has become necessary. Data earlier in the week showed that weakness in consumer spending, as well as property, limited China’s growth to 4% y/y in Q4 ’21 – the slowest since early 2020.

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