Chief Economist’s Weekly Briefing – The Stagnation Nation

The OECD’s updated outlook revealed that we are on course to be the stagnation nation, as new forecasts suggested the UK would experience the weakest growth in the G20 outside Russia next year. Why? Well, a combination of factors – high inflation, rising rates and increasing taxes. In the meantime, a further rate hike from the Bank of England is anticipated later this week, even with a weaker GDP figure this morning. Meanwhile Brexit afficionados wait with bated breath on the PM’s plans to scrap parts of the NI Protocol.  

Losing ground. UK GDP data for April confirmed that the recovery has stalled, for now at least. GDP shrank by 0.3% between March and April – the second monthly fall in a row, with all the main sectors showing contraction. Services sector output fell by 0.3% in April and that was the main contributor. An outsized factor was the unwinding of pandemic-era support measures, which dragged output in the health sector down by a hefty 5.6%. In some better news hospitality output was strong, rising by 1.0% while wholesale and retail trade grew by 2.7%. Elsewhere, manufacturing output fell by 1.0% from April, as firms struggle with higher energy prices and supply chain shortages, while construction output also fell following five months of solid growth. So quite a few sectors struggling but resilience in parts. That’s likely to be the story in the months to come.

Slowflation. Fears of ‘stagflation’ in the UK economy are mounting with inflationary pressures acting as a speed bump for economic growth. The composite PMI, covering services and manufacturing, fell from 58.2 in April to 53.1 in March. Outside of the lockdown periods, that marked the steepest loss of momentum in a single month since the index began in July 1996.  Record highs were also on display in the areas where you don’t want to see them, including input cost inflation, which came in at a level close to April’s all-time-high. Despite these headwinds, firms continue to increase their staffing levels at a robust rate. But the labour market is a lagging indicator, so likely will be the last to wilt.

What if? It’s well understood that many households were forced to save money through the pandemic as it became impossible to go on holiday or do many things that would normally consume people’s cash. But wouldn’t they have cut back on spending anyway given the crash in the economy? New analysis from the Office of National Statistics looks into exactly that question and finds that the combination of rising unemployment and falling asset prices should have pushed the saving rate from around 5% in 2019 up above 8%. Up, but well short of the 24% hit in Q2 2020.  

Worry over Wherewithal. The UK economy has turned anaemic as food and energy prices continue to spiral upward. The cost of living crisis has worsened, and consumer confidence has plunged. Around 77% adults reported feeling very or somewhat worried about falling living standards with women (81%) and those aged 30 to 49 years (82%) and 50 to 69 years (77%) being the ones fretting the most. A record rise in energy bills coupled with the failure of wages to keep pace with steep price rises is deflating the post-pandemic spending boom. Around 7 in 10 adults (68%) who said their cost of living had increased reported spending less on non-essentials. But there’s still some areas of strength to be found….

Jubilee Week. The CHAPS-based indicator of card spending showed a broad-based weekly increase of 6pps in the week to 1st June. UK seated diners were up by 23pps and transactions at London airport stores were up by 7pps. Of course, the long weekend prompted some loosening of the purse strings. But it perhaps still a signal optimism amongst the gloom and doom apparent in consumer confidence surveys. On the business side, 37% now say that they did not face supply chain disruption, compared to 42% in December 2021. But unsurprisingly, 26% of the businesses feel inflation is their main concern, up 6pps since February.

Charging. Supply-chain problems, squeezed real incomes and battered consumer confidence don’t point to a rocketing car sales market. As recent figures consistently show. There were 66.2k private car registrations in May, down 10% on the equivalent figure in 2021. And around 20% below the typical May from 2015-19. Not exactly charging ahead. But we’re still charging, just in a different way, with the shift into greener vehicles continuing. Across private, fleet and business, sales of electric and hybrid vehicles is up 15% year to date compared to last year with battery electric vehicles up 70%. And so, an encouraging shift in consumer preferences continues.

First amongst equals? As with Prime Ministers, London’s economic performance over recent decades has been increasingly removed from its peers – presidential even.  Latest data show that, once again, London is the UK’s best performing economy: growing an estimated 1.2% in Q1. That’s 50% faster than the national average. Alongside Northern Ireland, which remains in the EU single market for goods, London is now the only region where GDP has surpassed pre-pandemic levels.  Most regions are still producing much less than Q4 2019, with output in the West Midlands a staggering 10% below.

Out of the frying pan… 2022 was supposed to be a year of recovery from the global pandemic. In December last year the OECD forecasted global growth of 4.5% in 2022. Now they are forecasting just 3% growth this year. Inflation projections now stand at nearly 9% in OECD countries, twice what they previously projected. The main reasons for the pessimism are the war in Ukraine and zero-Covid policies in China. Disruptions to supply of food, energy and other commodities pushes prices up in developed countries and risks food crises in lower income countries.

Running hot. US consumer prices rose 1% during May, and 8.6% than a year earlier suggesting that Feb is under pressure to cool the economy. The monthly rise was significantly higher than the 0.3% increase in April and above consensus expectations of 0.7%. The headline CPI growth was driven by gas, food and housing prices. While core CPI- excluding volatile items such as food and energy- rose 0.6% in May driven by rapid services inflation and an increase in car prices. As CPI climbs to a new peak, the University of Michigan consumer confidence index has hit a new historic low and it seems that for our friends across the pond inflationary pressures will continue to be a pain point.

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