Chief Economist’s Weekly Briefing – Long and variable lags

A disappointing week for UK economic data. Underlying momentum in GDP growth is modest, firm confidence about growth is diminishing, and high-frequency data show sluggish activity. While rates are biting for households and the housing market. Are we seeing those famous ‘long and variable lags’ in monetary policy affecting economic activity at work?

Touch and go. August’s UK GDP print (0.2% MoM growth) makes it difficult to say if Q3 will see a contraction. For this to be averted, September needs to see a similar rise. But where to expect these gains from? Because August’s gains were largely driven by the unwinding of strike-related disruptions, and September might see weather-related drop in retail sales as well as a continued manufacturing downturn. So that leaves services. Some pockets of growth here, certainly – professional services posted 0.5% growth after rising 1.2% in Jul. But would this be enough? Hard to say.

Troubled waters.  Alongside weak economic activity, reports that high interest rates are putting more and more mortgagors under financial stress will give BoE policymakers pause for thought. For the third quarter running lenders report a deterioration in mortgage performance. In Q3 the net balance citing rising household default rates hit its highest since 2009 (43%). Expectations for fourth quarter defaults are bleaker still. With losses on the rise, mortgage availability is being restricted. Added to that, demand from homebuyers is plunging. If there’s a silver lining in the data it’s that, unlike in the financial crisis, credit remains available to support corporates.

Lower and slower. Firms across the UK are getting less confident about growth. The PMI showed that every part of the UK reported falling output in September, with the sole exception being London where businesses bucked the otherwise nationwide trend.  After several years of scrambling to keep staff, that slowdown is starting to translate into lower hiring activity too. Recruiting agencies reported fewer permanent hires, offset by a pick up in temporary staff.  Wage pressure remains high according to these surveys, though we’ll get the next set of official figures from the ONS this week.

Finger-pointing. Has the role of profits played an outsized role in ratcheting up inflation? The Office for National Statistics has taken a look and found the contribution of unit profits to be around one-fifth of the increase in domestic UKinflation, that’s in line with previous cycles. Coming at it another way, if unit profits had been playing more of a role in underpinning domestic inflation, this would be reflected in profits taking a higher share of GDP. But the average across Q1 and Q2 of this year was 22.8%. That’s barely above the 22.2% of the previous decade, and the 21.6% of the 2000s. No smoking gun here.

Still a mug’s game. The latest UK real-time indicators point to a gradual easing of inflation, accompanied by economic weakness. Online job adverts fell by 2% last week, taking it 7% below 2022 levels. Debit and credit card spending was broadly similar to same period last year, implying a substantial cut back in real terms. The proportion of businesses experiencing turnover uptick at 14% was the lowest in 2023. System price of electricity and gas also fell in the week by 31% and 20% respectively. However, the number of potential redundancies were 9% below last year, underlining why the path for inflation remains subject to a high level of uncertainty.

Steady. Provisional estimates (based on residency) suggest UK greenhouse gas emissions rose 2% between 2021-2022, following a 3% rise the year before. But context is key and Covid kept 2020’s emissions artificially suppressed. Measuring against pre-pandemic levels seems ‘cleaner’ (pun coincidental) and emissions dropped 7% between 2019 and 2022. Some notable wins from the largest emitters with Transport and Storage down 12% since 2019, energy supply down 8%, mining 7% and consumers (yes, that’s you and me), the largest emitters of all, down 7%. Agriculture is harder to crack, with emissions down just 1% since 2019, while Construction’s up 5%. Pretty amazing when you consider we don’t build anything. 

Slow and Uneven. That was the key message for economic growth, according to the latest forecast from the IMF. The Fund’s global growth projections of 3.0% in 2023 and 2.9% next year – a 0.1 ppt downgrade – show resilience to the shocks of the past few years. However, divergences are growing. On one hand, the US economy look set to grow by 2.1% this year, but the euro area was revised downward with a print of only 0.7%, dragged down by Germany’s economy. Closer to home, the UK economy appears set to continue a higher inflation reading than other G7 economies next year. While the UK’s GDP is projected to grow by 0.5% this year – an upgrade from previous forecasts – and 0.6% next year – down from the previous forecast of 1.0%. A disappointing performance, in other words, if it turns out to be the case.

Keeping us in suspense. The latest US inflation figures have reassured some but concerned others. In line with consensus, core inflation continued gradually on its downward path, falling from 4.4% YoY in August to 4.1% in September. Headline CPI held steady at 3.7% YoY, a little higher than expected – largely due to disappointing, but likely temporary, electricity price rises. Perhaps appropriately, given that the FOMC begins its next meeting on Halloween, markets have been mildly spooked by the news. Expectations of another Fed rate hike nudged up and Treasury yields rose. Clearly, monetary policy choices remain finely balanced.

Leave a Reply