Last week interest rates were hiked by the largest amount since the Bank of England gained independence in 1997. But it was the further hike in the estimated inflation peak, with it set to remain higher for longer, as well as a forecast recession that ultimately grabbed the headlines. Conditions outside the UK are little better, confidence in the Euro area is dropping and Chinese PMIs are contracting as the impetus from reopening fades.
Continue readingCentral bankers are raising rates at the fastest pace since 1980s, with the Fed last week raising rates by 0.75 ppts. Will the Bank of England follow suit on Thursday? Members will need to navigate a tight trade-off between growth and inflation. Given the latter remains at eye-watering levels, a rate hike is very much on the cards. However, the question remains whether the BoE will stick to a gradual approach or will step up the pace of its tightening cycle following the lead of other central banks.
Despite the upsurge in recessionary chatter, Northern Ireland’s labour market continues to churn out positive headlines. The ILO unemployment rate in the three months to April stood at 2.6%, just north of Q1 2020’s pre-pandemic level (2.5%) and the record low of 2.3% (Sep-Nov 2019). Both the HMRC payrolls data and the Quarterly Employer Survey (QES) posted record employee numbers for May and March 2022 respectively. Meanwhile there is still nothing of note on the redundancy front. From a recession watch perspective there is certainly ‘nothing to see here’ as far as the local labour market statistics are concerned.
At this point upside surprises in inflation rate occur with such frequency that “surprise” is probably the wrong word for them. Inflation in the UK rose for a ninth month in a row in June and was the highest among G7 countries, while with another hefty rise in the energy price cap to come, the inflation peak is still some way off. Meanwhile PMI data across the UK, Eurozone and US all point to slowing growth momentum.
The UK reported better than expected growth in May. However, the elephant in the room is stubborn inflation. Americans are already feeling the heat, as inflation hit a fresh 40-year high last week. Surging price pressures and a darkening economic outlook for Europe is helping drive down the value of the euro, which briefly touched parity with the dollar for the first time in 20 years. Meanwhile the Bank of England is signal rate hikes might quicken!
After days of drama last week, the UK will soon have a new prime minister. The new administration will inherit stagnation in productivity, falling real incomes plus soaring inflation. In the meantime, the wind has changed for many commodity prices, which have slumped dramatically partially due to recession fears, while Europe is preparing for Russian gas to be cut off this winter.
Today sees the release of June data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – signalled that output and new orders both fell sharply as severe price pressures caused demand to contract. Business confidence also waned, but companies continued to expand their staffing levels.
Central bankers adopted a more hawkish tone at an industry get together last week, warning that the era of low rates and modest inflation may be at an end following the double whammy of Russia’s invasion of Ukraine and the Covid shock. Gloom still dominates global headlines: US consumer confidence deteriorated amidst inflationary concerns, while price pressures continue to build in the Eurozone.
It used to be that nobody wanted to mention the word recession and doing so was seen as a self-fulfilling prophecy. But going through the deepest recession on record from a Northern Ireland perspective during the pandemic has perhaps desensitised us. At the minute, recessionary chatter is actually the norm. Around the world, talk of the roaring 20s has been confined to the dustbin. Like Covid, talk of the R-word is spreading fast.
Soaring inflation cast a shadow over business sentiment. Fresh PMIs released last week reinforce the view that UK economy is flatlining as growing uncertainty about the rising cost of living eats into consumer spending intentions. The squeeze on households’ real incomes is pushing up wage demands with rail workers on strike last week. On the pandemic front UK is experiencing another surge in infection rates.
