The UK economy turned in a solid performance on the eve of Omicron, with GDP surpassing its pre-pandemic level by 0.7% in November. Meanwhile the Omicron wave is receding, with signs that infections and hospital admissions have peaked. But challenges await. Inflation in the US is at its highest in four decades, with our own multi-decade high soon to come if forecasts are to be believed. A 6% rate would be the highest since the early 1990s.
Back in December 2021, NISRA’s Index of Services and Industrial Production surveys for Q3 2021 revealed that economic output was closing in fast on pre-pandemic levels or indeed even exceeding them.
For example, industrial production (which is mostly manufacturing) was just 0.1% below the pre-pandemic level of Q4 2019 while private sector services output was 2.2% above the same benchmark.
Today we got a more complete picture with the release of the Northern Ireland Composite Economic Index (NICEI) and the Index of Construction for the third quarter.
Omicron knocked back recovery hopes in December. But business adaptation and the fast roll-out of boosters means the setback might well be short-lived and a modest one. Meanwhile, outlasting Omicron and set to be among the big trends of 2022 is the shortage of workers, inflationary pressures and the climate transition. One-in-four cars sold last year were plug-ins of some variety. A reminder that things can change for the better, and fast.
Today sees the release of December data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by IHS Markit – indicated that a reduction in consumer confidence amid the emergence of the Omicron variant led to a further decline in new orders, while growth of business activity was only fractional. Inflationary pressures remained elevated. On a more positive note, a further solid rise in employment was recorded and firms were optimistic regarding the outlook for output in 2022.
The Bank of England became the first major central bank to raise rates since the pandemic struck. It judged that rising inflation outweighed concerns over an Omicron-induced slowdown. In the meantime, COVID cases have leapt, prompting new restrictions and speculation of much more to come.
Continue readingThe podcast that keeps you up to date with what is happening economy-wise in Northern Ireland.
On the cusp of Christmas, it feels apt to reflect on the past, present and future of the local economy. And with issues like Covid, Brexit and rampant inflation very much on the agenda, there is no shortage of scary topics to discuss.
2021 was the year of the rebound and it was full steam ahead on the recovery with the roll out of vaccines facilitating that by allowing the economy to open up. This meant that vaccine queues were one of the images of the year, rather than the expected dole queues which were the ghosts of the past that didn’t come back to haunt us.
Output within Northern Ireland’s private services sector is back above pre-pandemic levels and has finally recovered the lost output from the previous recession – that’s the Global Financial Crisis / Property Crash one. It took the V-shaped recovery from a pandemic to get it back to levels last seen almost 15 years ago.
When it comes to the labour market, we are back above pre-pandemic levels in a range of areas including the number of employees on local payrolls. These have now reached record levels whilst the unemployment rate is below 4%. Predictions of a surge in unemployment following the end of the furlough scheme have proved wide of the mark. Some would say, with justification, that the job retention scheme has been probably the best pandemic policy in the world. Although some aspects of the labour market such as total hours worked and the number of self-employed are still well below pre-pandemic levels.
The annual pace of UK CPI inflation jumped from 4.2% in October to 5.1% in November representing the highest rate in over a decade. That also means the UK’s inflation rate now exceeds the unemployment rate. No economist foresaw that scenario at the start of 2021. Last month’s reading was stronger than expected with the Bank of England previously not expecting a breach above 5% previously until early next year. The latest inflationary news coupled with yesterday’s strong labour market data will make for an uncomfortable Monetary Policy Committee (MPC) meeting tomorrow.
Until the arrival of the Omicron variant, the MPC were expected to raise interest rates by 15bps from the record low of 0.1% to 0.25% at tomorrow’s MPC meeting. This would mark the first December interest rate rise since 1994. However, the new added layer of uncertainty stemming from the Omicron variant has led economists to row back on expectations to increase rates until early in the new year. Indeed, in recent days some of those MPC members already voting for a rate hike in previous meetings have signalled that they may have to wait a bit longer. Yesterday the IMF said the Bank of England needed to increase interest rates now to prevent inflation from becoming ingrained and fuelling increases in wage demands.
Increases in prices of petrol and second-hand cars were the key drivers of the latest surge in inflation. However, price rises were broad-based across goods and services. Consumer price inflation was as low as 0.4% y/y in February of this year and is now expected to peak closer to 6% than 5% in Spring 2022. Any reading above 5.2% (which occurred on Sep-08 and Sep-11) will represent the highest reading since March 1992 (+7.1% y/y). So we are poised to see consumer price inflation hit a 30-year high in the coming weeks while the Bank of England’s Bank Rate (currently) remains at a record low.
It is worth remembering that September’s CPI rate (3.1% y/y) is used to set the increase in welfare benefits, such as Universal Credit payments. Similarly the majority of people working are unlikely to see wages keep up with inflation and will also see a fall in their standard of living. Clearly those that can least afford it will experience the biggest squeeze in their cost of living. Inflation will be just one part of this squeeze, with tax rises the other. National Insurance Contributions are set to rise by 1.25 percentage points next April while income tax thresholds will be frozen for 4-years. The cost of living crisis is set to be the dominant economic story in 2022.
Selected items y/y inflation rates in November 2021
Boris Johnson fired the starting pistol for a major jab fest over the next three weeks in what could be dubbed the jab before the storm. It comes at a time when the UK’s recovery appears to have stalled in October as firms struggled with supply chain problems and staff shortages even pre-Omicron. Reintroduction of restrictions to curb spread of Omicron, will hit travel and hospitality sectors the hardest again. October’s slowdown will further complicate monetary policy dilemma, and the prospects of a delaying a rate hike this week are strengthening.
Today sees the release of November data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by IHS Markit – pointed to a pick-up in business activity amid signs of stabilisation in new orders and ongoing employment growth. That said, supply-chain problems continued to impact operations and inflationary pressures remained acute. In fact, output prices increased at the fastest pace on record.
Vaccine effectiveness and the degree of transmissibility of the Omicron variant are still under investigation. In the meantime, the spread is quick–UK has detected 160 cases. Tighter rules and changes in behaviour are already affecting the near-term economic outlook. But it’s too early to conclude if the new variant is a game-changer.
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