Chief Economist’s Weekly Briefing – Descent

The UK economy is already struggling for traction but prominent voices in the Bank of England indicate a little bit more tightening in rates is on the way. As the holiday season approaches, some seasonal improvements in spending and hiring are likely. But these should not be mistaken as signs of a recovery. That, unfortunately, is still a long way off. But the UK is not alone in its woes. Waning economic momentum and high inflation are firmly problems shared. 

Hook, line and sinker. November’s composite PMI continued to point to a recession in the UK economy, despite the recent decline in political and fiscal uncertainty. It remained broadly unchanged at 48.3 in Nov (48.2 in Oct)—the lowest reading since Jan ’21. The Nov reading is consistent with around a 0.2% quarter-on-quarter contraction in GDP in Q4. Further, the services PMI held steady at 48.8, above the consensus 48. The manufacturing PMI also remained unchanged at 46.2, also above the consensus, 45.8. IHS Markit said that aside from the pandemic, the UK PMI was now pointing to the biggest quarterly fall in economic output since early 2009, with a drop of 0.4%.

Normalisation.  Speaking separately last week, two Monetary Policy Committee members – Chief Economist, Huw Pill, and Deputy Governor, Dave Ramsden – both confirmed that they believe Bank Rate needs to rise further to bring inflation back to target. Though, probably not to the 5%+ levels recently priced by financial markets. Alongside the energy shock, both stressed that declining labour market participation amongst individuals aged 50-65 years risked leading to more persistent inflationary pressures. Pill’s choice of language was revealing too. He framed the BoE’s eight back-to-back rate hikes as a “normalisation” of monetary policy, describing the past decade as “exceptional”. The message: better get used to it.

Pay up. We all know by now that inflation is rising rapidly (11.1% in Oct), but are wages rising to match it? UK wage growth was only 5.7% y/y in the three months to September, meaning pay has fallen in real terms. As inflation has picked up pace, wage growth has drifted behind in all but professional and scientific industries, which saw an increase of 10.1% in recent months. Meanwhile, the public sector saw an average growth of only 2.2%, with low figures recorded in education, public administration, and arts and recreation. This is the biggest gap between public and private pay growth on record, excluding during covid, and that’s before bonuses too!

Blip. Card based spending in the UK increased by 2% vs the previous week while restaurant reservations increased by 3%. The number of online job adverts also saw an increase of 3%. So, is an economic turnaround round the corner? Probably not. Adverts were arguably affected by seasonality and remain 14% below the levels seen at the same time last year. A quarter of businesses experienced lower turnover in October and a similar proportion expect their turnover will decrease in December. While the number of employers mulling redundancies remains 43% above last year’s equivalent figure. Although it’s llittle changed from recent months, despite the more challenging outlook, which is some encouraging news.

Paying the price. UK government borrowing rose in October as the costs of the Energy Price Guarantee and extra support to those on benefits started to be accounted for. The headline monthly deficit of £13.5bn was £4.4bn higher than in 2021 and will probably rise further as estimates of the energy support scheme for businesses have yet to be produced. Elsewhere the beneficial effects of inflation on public receipts was evident, with VAT revenues up 6% and Income tax up 8%. Though mounting industrial action from public sector workers likely means higher wage costs coming down the track too.

Made in Hillsborough.  Chris-Heaton-Harris, NI Secretary-of-State, unveiled a ‘mini-Budget’ last Thursday. Unlike the Kwarteng version, this was a mini-fiscal event covering public spending up to next April. A budget Made in Hillsborough to (largely) address a £661m overspend Made in Stormont (resulting from energy / inflationary pressures). Pressure on the local public finances remains.  The bogeyman of potentially introducing water charges, a ‘no-go area’ for local politicians, was raised by the SoS. This card has been played before by previous SoS’s dating back to Peter Hain to encourage a return to Stormont. Water charges (~£345m) are part of the £616m package of ‘super-parity’ measures that NI citizens benefit from annually but their peers in GB do not. No shortage of fiscal challenges await a new Executive.

Higher “eduflation”. While long-term sickness is keeping older population away from the workforce, economic participation among young people is also falling. Young people not in education, employment or training (NEET) was 10.6% in Q3, up 0.2 ppts. For those who are in education, things aren’t great either. Student Cost of Living (SCoL) surveys showed 91% of those in higher education are concerned about cost-of-living rises, 65% report moderate to major financial problems, and a quarter had taken on new debt in response as many found their student loans to be insufficient to support living costs. Against the backdrop of declining productivity growth in the UK economy, economic inactivity and costly education are causes of concern.

Not alone. Consumer price inflation in the UK has reached levels not seen for over 40 years. It might be a small consolation, but most of the 29 advanced economies assessed by the Office for National Statistics (ONS) are in the same situation, because inflation has global reasons – higher energy and food prices. 69% of countries have “high” or “very high” inflation compared with their 50-year trends; and 79% experienced inflation rates above 6% in September. Most spikes in global inflation since the 1970s have followed global energy price increases, including the two oil price shocks in the 1970s and events in 1990, 2001, 2008 and 2011. It’s little consolation just now because the pain is being keenly felt, but if there’s a siliver lining it’s that there are increasing signs a descent in inflation is just round the corner.  

Achtung baby! Not a happy Thanksgiving as the US ‘Flash’ PMI fell to 46.3 in November. US businesses are saying they’re firmly and unmistakably feeling the pinch. And it’s the speed of decline that raises both eyebrows and fears. It’s one of the quickest since 2009. That said, input prices, a chief driver of the decline, are easing, thankfully. Things are marginally brighter in the eurozone. Their PMI, while still below the 50-waterline, rose a smidgen to 47.8, from 47.3. And input prices fell too. The pain is particularly acute in

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