Chief Economist’s Weekly Briefing – Pressure building up

After sizzling-away throughout the pandemic, the UK housing market may finally be losing some of its heat: the cost of living crisis and higher interest rates are squeezing demand, with mortgage approvals sliding to the lowest level in two years. Meanwhile the EU decision to tighten the embargo on Russian oil by year-end drove Brent crude prices to the highest level in months. Locally, SSE gas customers were warned of a hefty 42.7% price increase coming into effect next month. Ouch!!

(Non) Bella Italia. A Twitter campaign by anti-poverty activist Jack Monroe led the Office of National Statistics to explore inflation among Britain’s lowest-priced foods (have the poor fared worse?). The answer is nuanced. While price rises across value versions of 30 everyday items have matched the average (6-7%), increases did vary across goods. Of the 30 goods surveyed, six items fell in price while five rose by more than 15%. With pasta and beef mince, up 50% and 16%, a budget ‘spag bol’ is tricky. But those on a budget feel the pain when the cheapest item is out of stock, as the next cheapest can often be 20% dearer.

Help wanted, enquire within! What’s holding businesses back? Rising costs of materials is certainly a big issue but it’s getting hold of staff that’s most challenging. According to the Office of National Statistics,1 in 8 UK businesses were having difficulties recruiting, rising to 1 in 3 amongst those in the hospitality sector in April. Where people are being asked to work is changing too. 21% of businesses are using hybrid working with another 8.5% working exclusively from home. These averages mask big differences driven by size of firm (larger meaning more likely to be hybrid) and sector (professions and technology the most remote) but underline how much has changed.

Decision time! News from the monthly Decision Maker Panel seems to confirm what we already knew. For a start, private sector output price inflation in May was 7.3%, 0.8 ppts higher than in April. While, looking at the future, businesses expected inflation to be 6.9% one-year ahead before retreating to 3.8% in three years’ time. 54% of respondents reported that uncertainty for their business was ‘high’ or ‘very high’ at the moment, 3 ppts higher than in April. Uncertainty around future inflation increased further in the three months to May. However, there was a modest decline in uncertainty relating to the war in Ukraine, Covid and Brexit.

To have and have not. Far from dipping into their pandemic-era savings pile, as inflation crescendos, UK households added another £6.3bn to savings balances in April. That’s £1bn more than the pre-Covid average. Yet not everyone is able to put money aside. In the same month, individuals borrowed an extra £1.4bn in unsecured credit; £0.1bn more than March’s total and up 40% on pre-Covid levels. Three-month annualised growth in credit card borrowing has accelerated to a till-ringing 23% and may well remain strong for some time: outstanding card balances are still a whopping £11bn below early-2020 levels. Don’t count-out the consumer yet.

Divergence. Rising energy prices (+39.2% y/y) propelled Eurozone inflation to a record high of 8.1% y/y in May and comfortably exceeded market expectations. This has triggered debate on whether the ECB will plump for a Fed-style 50bps interest rate hike in July instead of a 25bps move. Core inflation – which strips out volatile items such as food and energy – accelerated from 3.5% to 3.8% indicating underlying inflationary pressures. Inflation is most pronounced in the Baltic states of Estonia, Latvia and Lithuania which border Russia and Belarus. This has resulted from the trade disruption and sanctions on Russia because of the invasion of Ukraine. Estonia (20.1%) and Malta (5.6%) currently bookend the 19 countries in the Eurozone CPI contest.

The worst is behind us? Activity still broadly shrinking just more slowly than in April, according to the PMIs for China. The official manufacturing PMI rose to 49.6 in May (Apr:47.4) given that zero-Covid restrictions were not tightened further and both production and demand show much narrower contractions in the manufacturing sector. The improvement in the manufacturing PMI was led by a jump in output, and new orders, which are still falling m/m but more slowly. That said there is evidence that the recovery will be slow: the employment reading, which only nudged up to 47.6, (Apr:47.2), suggests that there has been little improvement in the labour market. Nevertheless, economic conditions should improve fuelled by stimulus policies announced last week and natural rebound in activity as the economy reopens.

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