Chief Economist’s Weekly Briefing – Top Targeting

Last week brought good and bad news for households facing a cost of living crisis.  First, the bad: Ofgem gave early warning that it expects to raise the default tariff by an eye-watering 42% in October.  That will push typical gas and electricity bills to £2,800.  Better news comes from the Chancellor of the Exchequer, who unveiled a fresh package of measures to support households (with giveaways partially funded by a windfall tax on oil and gas companies).  It’s big, timely and well targeted. The burning question is: will these new fiscal measures add fuel to the inflationary fire or not?

Balanced. On May 26th the Chancellor of the Exchequer, Rishi Sunak, announced a package of measures to ease cost of living pressures.  These include a one-off £650 payment to the lowest income households and £400 non-repayable credit on energy bills for everyone. In addition, eight million pensioners and those on disability benefits will also receive £300 and £150 grants respectively. The lowest earners, worst affected by rising prices and less likely to have savings, should be helped by the well targeted package. The total bill of £15B is equal to 1% of households’ disposable income and materially reduces the risks of recession this year. However, fiscal support together with the tight labour market could give the Bank of England a little more leeway to raise interest rates.

Impact.The cost of living crisis is making its presence felt amongst UK firms, as suggested by UK composite PMIs. Business activity within services slumped from 58.2 in April to 51.8 in May – a 15-month low. The loss of momentum within manufacturing was less pronounced.  But both sectors are being buffeted by record rates of input cost inflation. Optimism amongst UK firms fell back to a 2-year low as global and domestic headwinds intensify. Food & energy prices are consumers’ primary concerns. According to the Office of National Statistics, 44% of UK adults reported that they were buying less food when shopping over the last two weeks. That’s up from 18% at the start of the year. Meanwhile 1 in 4 are considering energy efficiency improvements to their home.

Jobs anyone? It looks like the number of jobs advertised is not the only metric on the increase. Whilst the total job advert volumes rose by 7% – with graduates and legal jobs being the largest categories – nearly half (47%) of businesses in April saw an increase in the price of goods, materials, and services brought. There are clear indications that demand is weakening in the face of price pressures. UK credit and debit card purchases fell by 3 percentage points across almost all categories in the week ending 20th of May – suggesting that as inflation continues to escalate, people are belt tightening as they prepare to ‘ride the storm’.

Towards the black. Budgeting is on many peoples’ minds at the moment as prices rise at their fastest rates for decades. The UK Government’s finances have improved substantially and the first month of the new fiscal year underlined that progress as the deficit in April fell to £18.6bn (down £5.6bn from last year). Stronger revenues did most of the work with VAT receipts up 12% and income tax up a thumping 18%. Higher prices and rising wages are clearly flowing through to the Treasury’s coffers, just in time for the Chancellor’s big spending announcement this week.

City slickers. The rise of cities, especially large ones, defined the pre-Covid era as one of urban dominance. And, although the pandemic shook the jobs cart, it seems normal service has been resumed. Although London took the biggest hit in online job adverts between 2020 and 2021 (down 43%), it rebounded by 118% the following year. Newcastle drove the North East to pole position among the Great British regions for overall growth in job demand between 2020 and 2022, accounting for a quarter of the region’s job demand. But it is not all good news for these urban areas, 9 local authorities have still failed to recover since the pandemic, of which 5 are in and around the London area.

Hybrid Theory. Covid may be fading, but home-working isn’t. In fact, Britons seem to be getting more keen on it. Back in February, more than 8 in 10 workers who had to work from home during the coronavirus pandemic said they planned to hybrid work. Hybrid can mean different things, of course. But the most common pattern workers planned to use was mostly from home, with 42% trumping for that set-up. That’s up from 30% a year ago. And meant those who were set to be equal opportunity workers, halving their time between home and work, had actually fallen in that time.  Food for thought for firms evaluating their office footprint.

Experimental. The past two years brought a lot of disruption, including to migration flows and migration measurement. Measuring by conventional methods (based on the International Passenger Survey) in 2020 net migration to the UK was mere 33K. But according to new experimental estimates using administrative data, in the year ending June’21, net migration amounted to 239K. So, either the first half of 2021 saw a radical change in trends – which is possible due to lifting of some Covid restrictions – or new measuring methods are registering radically more immigrants. Census results, which should be published shortly, will show which method gave more reliable estimates.

Headwinds. The UK was not the only country to see a slowdown in PMI survey data in May. Major developed economies are coming under pressure from soaring inflation. The US composite PMI dropped to 53.8 in May from 56.0 (Apr), its lowest level since January. Both manufacturing and services reported weak growth rates, though the former remained somehow more robust. Growth remained more resilient in the Euro area amid rising commodity prices and accelerated inflation. The composite PMI fell to 54.9 in May, from 55.8 (Apr), but still points to solid expansion and is consistent with acceleration of GDP growth in Q2. Manufacturing continues to feel the pain from elevated commodity prices and disrupted supply chains, while the services reading was higher and recorded its second-strongest expansion in the past eight months. Perhaps that could encourage a hawkish move from the European Central Bank in July? 

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