Chief Economist’s Weekly Briefing – All rise

Things are going up lately, from inflation, interest rates, energy prices, while covid cases also ticked up. Last week central banks addressed the most important feature of the post-pandemic era, rising inflation, while also acknowledging the hit to growth as a consequence of the war in Ukraine. US Federal reserve announced its first interest rate increase since 2018, and Bank of England completed the third consecutive hike. This week is Chancellor Rishi Sunak’s turn, who is under pressure to use his spring statement to help alleviate the cost-of-living crisis.

As you were. The Bank of England completed its third back-to-back increase in its Bank Rate since December as inflationary pressures continue to build. Indeed, the Monetary Policy Committee (MPC) now expects CPI to exceed 8%. Last week’s 0.25 percentage point hike took the central bank’s policy rate back to its pre-pandemic level of 0.75%. But one of the nine members of the MPC dissented with the move. The MPC judges that further ‘modest’ tightening in monetary policy ‘might’ be appropriate in the coming months. While a fourth successive rate hike remains on the cards for May’s meeting, expectations for more aggressive rate increases are being scaled back.

Tight on. UK’s labour market continued to tighten over the winter, with unemployment falling and the number of job vacancies soaring to a new record high (1.3 mn). The unemployment rate fell to 3.9% in January—now close to its 2019 low point—from 4.1% in December, while labour market participation is weak, economic inactivity has increased slightly (+0.1ppts) on the quarter (to 21.3%) driven by older people leaving the workforce. Wage growth is, unsurprisingly, failing to keep up with inflation. Average earnings (excluding bonuses) were 3.8% higher than a year earlier in November to January period, equivalent to a real terms fall of 1%.

I quit. Lower employment post Covid can be entirely explained by fewer people over the age of 50 still working. So why have these workers quit? Roughly half of those who have left the UK labour force say that they’ve retired, presumably a little earlier than they were planning to previously. Sickness and caring responsibilities are the next two leading factors, painting a less rosy picture of the change. But their skills aren’t lost to the labour force just yet.  Around 6 in 10 aged 50-60 would consider returning to work if they found a suitable opportunity and that flexible working was key.

Mixed bag. Around the UK the unemployment rate fell for all except three regions in the three months to January. The biggest falls were for East Midlands (-1.1ppt) and Northern Ireland (-0.8ppt). Moreover, the strength of the labour market is likely to continue in February as payroll employees’ number went up a healthy clip, most notably for London (+1.3ppt) and Scotland (+1.2ppt). But, just like the headline data, good news came with some bad news. The rise in inactivity rate was uneven. South East (+0.9ppt, 19.3%) and Northern Ireland (0.6ppt, 27.5%) saw the most rise followed by Yorkshire and Humber.

Last orders? Prices have been going one-way in Northern Ireland’s residential property market for almost three years. Over the last 11 quarters the cumulative price gain has been 17.5%. Not bad if you are on the property ladder.  Not good if you are aspiring to get on it. But is this period of growth coming to an end? Prices increased by just 0.1% q/q in Q4 2021, the weakest rise since the first lockdown. On an annual basis prices (7.9%) are still outpacing consumer price inflation…for now.  Interest rate rises coupled with an intensifying cost-of-living crisis will buffet the housing market like the rest of the economy in 2022.  But a shortage of supply will provide support for prices. 

Record high. Northern Ireland’s manufacturing and services output continued to rise further above their respective pre-pandemic levels in Q4 2021. Despite an Omicron-induced fall in sales within wholesale & retail trade, accommodation & food; services output hit a new record high. That was due to strong growth in business services and finance alongside a record high in transport, storage, information and communication (logistics & ICT). Manufacturing’s modest output growth in the final quarter ended a good year. Local manufacturing enjoyed its strongest rate of expansion in a decade. Although that conceals an unbalanced recovery. Spare a thought for manufacturers of transport equipment (e.g. aerospace) with output still 40% below pre-pandemic levels. 

Suits you (not). Video killed the radio star and Covid killed the suit. Yep, the suit, which emerged in the early 1800s to become the uniform of the professional classes, is ejected from the inflation basket. Coal is also on the scrapheap, as it’s due to be banned domestically, and the humble black bin liner’s gone too. Somewhat sadly, atlases and reference books are out. But let’s look forward. We’re more health conscious, so sports bras and crop tops are in, as are climbing sessions. And Covid has accelerated the number of pet parents, so pet collars are now included. Bless!  

Domino-effect. The war in Ukraine has led to a 15% rise in gas prices in the week ending 13th March, now three times higher than it was six months ago threatening to exacerbate the cost-of-living crunch. An increased number of businesses have also reported that cost of materials, goods and services have risen since last month, which has driven up selling prices. In the meantime, 83% of adults have reported cost of living had increased (vs. 62% in November last year), especially in areas like food, energy bills and fuel prices, while credit and debit card purchases reduced by 2%. As households face the worst cost of living crisis in decades, the days ahead might look more difficult, especially for poorer households where the anticipated hit on budgets will be higher.

Not just oil and gas. A war in Europe’s breadbasket, besieged Black Sea ports and sanctions on Russia have triggered a supply shock that is ripping through the world economy. The focus is on energy prices, which climbed to historical highs since conflict began. But Russia and Ukraine are also important food producers, and together account for 12% of the calories traded worldwide. Wheat prices have risen by 40% and will probably increase further. Russia is also the biggest supplier of potash — key ingredient in fertilisers. This will affect wider agricultural crops and prices. The UN International Fund for Agricultural Development said the impact of the rising food and crop shortages was already being felt in the Middle East and North Africa triggering anxiety about food security and political stability.

Off we go. The Bank of England wasn’t the only central bank in rate hiking mode last week. The Fed, many would say belatedly, hiked rates by 25bps, bringing the target range to 0.25 to 0.50 per cent. It’s the opening salvo in what’s anticipated to be a sustained tightening cycle. A total of nine hikes are anticipated through to next year. And it’s not the only form of tightening. The Fed is also expected to begin running down its balance-sheet, which had doubled in size over the pandemic as government debt was bought up in large quantities in response to Covid.

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