Chief Economist’s Weekly Briefing – War, Peace & Inflation

The Russian invasion injects further uncertainty raising questions about the availability and price of energy, food and other critical raw materials. Oil is the latest market to show this stress, with prices hitting $140 per barrel, close to all-time highs and a record high when priced in sterling (£99pb). In the meantime, the prospect of an acute real income squeeze will provide a significant headwind to spending. All this suggest that inflation will stay higher for longer. Central bankers have a difficult task ahead in balancing growth during a lingering pandemic and rising prices.

Imploding. Seven Russian banks were disconnected from the SWIFT payments system. Sanctions on Russia’s Central bank prevent it from using foreign reserves to soften the impact of other sanctions or finance the war in Ukraine. The value of the Russian rouble has collapsed by 50% and even this decline is underestimated because it is not possible to buy foreign currency at the official rate. Amid growing queues at cash machines, the Central bank tried to prevent the currency falling further by raising the policy rate from 9.5% to 20% and preventing trading.

Reach for the plastic. UK unsecured lending grew at its fastest pace since the start of the pandemic in January. The annual growth rate of consumer borrowing on all forms of credit including loans, car finance, and credit cards accelerated to 3.2% in January from 1.5% the previous month. The slump in new car sales, linked to semi-conductor shortages, has acted as a break on car loans growth. The pick-up in borrowing was most marked with credit card spending with the annual growth rate trebling to 6.2% in January and approaching a three-year high. The cost-of-living crisis is expected to see more consumers reach for the plastic and loans to cover bills as the squeeze intensifies.  

Time to relax. Coronavirus crisis left profound impacts on the UK labour market, one of them being the trend of early retirement by older workers against the backdrop of persistent labour shortages. A recent survey by Office of National Statistics (ONS) revealed that the most common cited reason for this was willingness to retire (47%) driving a sharp rise in economic inactivity. Other quoted pandemic (15%), illness or disability (13%), and mental health (10%) but very few mentioned job losses as the reason. More importantly, c.60% said that they would not consider returning to work. Inter-sector differences exist with those in health, retail, education, and manufacturing more likely to leave. For those open to coming back to the work, flexibility in the job would be the biggest motivator.

Open to the world. Another impact on the labour force was the migration of workers, which was confounded by the Brexit. Payroll data reveals that the employment for EU nationals fell by 6% (171k) in two years to June 2021, offsetting increase of 9% (186k) for non-EU nationals. In hospitality industry, EU employment was down by almost a quarter, even though for UK and non-EU nationals, there was full recovery. Sectors such as construction and transportation and storage have struggled to fill the vacancies with the pool of UK nationals, leading to increase in both EU and non-EU workers.

Demand Postponed. As UK consumers face a real income crunch, private car sales took a further hit in February. Private new car registrations totalled 27.8K, that is, below the February 2020s average (34k) and 21% down from 2015-19 February average. Google Trends data show that the number of searches for the top ten car brands dropped in the week to March 6 to 83% of its pre-Covid average suggesting that demand is weakening. Households’ real disposable income is set to fall about 2% this year, while the major purchases index of GfK’s consumer confidence survey dropped to -15 in February. In addition, surge in energy and other commodity prices —following Russia invasion to Ukraine — makes unlikely for the car sales to return to pre-Covid average this year.

Back to the new normal. Covid restrictions are relaxing, and people’s behaviour is changing yet again.  In the second half of February commuting activity got back to its pre-Omicron level around the UK. That meant roughly 15% working exclusively from home, just under 60% going into their workplace every day and the balance doing a bit of both. This reversal has been rapid compared with previous instances when the rules have changed. Hence, the coming weeks will be a good test of whether this represents the new normal or whether we’ll see further change. 

Galloping. The Russian invasion of Ukraine has continued to worsen the inflation expectations for Euro area as the oil prices were pushed to over $100 a barrel for the first time since 2014. Euro area annual inflation is expected to be 5.8% in February, up from 5.1% in January ,adding pressure on the European Central Bank to speed up the unwinding of its stimulus programme and hike interest rates. The impetus is expected to come from energy prices (32%, up from 29% in January), followed by food, alcohol & tobacco (4.1%). Russia accounts for 40% of Eurozone’s imports of natural gas, a key source of energy for the bloc. Hence, the Eurozone economy outlook set to dampen by the steepening of energy prices as the war brings into question Europe’s reliance on Russian energy.

 Advancing. The Caixin manufacturing PMI edge up to 50.4 in February, from 49.1 in January, as business conditions improved slightly across the sector. Output and new orders —both rose back above 50— amid the fastest increase in total sales since last June. However, external demand remained subdued – new export orders continue to fall sharply and remained in the contractionary territory for 7th consecutive month. Inflationary pressures are still building with input prices and output charges climbing, which partly reflect energy and raw commodity increases. Surprise to the upside came also from non-manufacturing PMIs according to the National Bureau of Statistics; services PMI bounced back slightly to 50.5 from 50.3 in January, reflecting some holiday effects, however the pickup was not as strong as the usual seasonal pattern. The jump in construction PMI was more pronounced with the gauge surging to 57.6 from 55.4 in January.

Good job. Events in Ukraine blunt even good news. But we should welcome it when it comes, and it’s happening in the US jobs market, where payrolls leapt an impressive 678,000 last month. That’s roughly the population of say, a Boston or a Detroit. Job growth was broad across sectors. A quick temperature check shows the hottest sectors are leisure and hospitality, professional/business services, health care, and construction. Unemployment edged down to just 3.8%, a notch above its pre-pandemic 3.5%. That’s good. But it’s hard to say how isolated US workers will be from European events.  

Leave a Reply