Last week’s releases suggest that February has been a favourable month for UK economic activity. An improved economic outlook since Q4 seems to be the main driver, along with some seasonal factors. But let’s not heave a sigh of relief just yet. Inflation is still in double digits, and borrowing costs are elevated. A recession is still on the table, although latest figures suggest it’s likely to be milder than many thought. And the NI Protocol logjam appears to be on the cusp of a breakthrough. Watch this space.
We got a good read of how the UK economy is performing last week. Unemployment is low but the labour market is loosening, price pressures are gradually abating and consumer appetite is diminishing. All reasons that might prompt the MPC to hit the brakes on its programme of rate hikes at its next meeting on 23 March. But there is no immediate respite for Britons; households are still feeling the pinch.
The big news last week was the UK narrowly avoiding a recession towards the end of 2022. But that’s not enough reason to celebrate. Businesses remain pessimistic, consumer confidence is at record lows, and policy is at its tightest in recent times. Even with energy prices set to retreat more quickly than previously, the squeeze is still being keenly felt. For now, most indicators suggests that conditions are going to get more difficult before the improvement comes.
Today sees the release of January data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – signalled that although the private sector remained in contraction territory at the start of the year, there were signs of the downturn losing pace. Softer falls in output and new orders were recorded, while employment increased, and firms expressed optimism in the 12-month outlook. Rates of inflation remained elevated, but softened to two-year lows.
Last week the Bank of England joined the bandwagon of advanced economies’ central banks in continuing to hike interest rates. But it came with two sources of hope. First were some clearer signs that the Bank is approaching the end of the tightening cycle. Second was a slightly rosier outlook, namely a shallower recession and a less sluggish recovery, than was forecast in November. It’s still set to be a distinctly challenging year, but it counts as good news for now.
2022 was the year in which energy prices soared, and as we came into the new year, there were fears of energy shortages or even the lights going out due to blackouts. As we move further into 2023, energy prices are still very much on our minds, but people will be hoping the lights will go back on at Stormont to help deal with challenges that households, businesses, the public sector and society as a whole face this year.
It’s Bank of England decision time this week as the MPC will meet to set (and likely raise) Bank Rate. How are we placed currently? For one, the economic downturn is gathering steam. For another, businesses appear in no hurry to stop raising prices, even with energy prices coming down. But cost of living concerns remain entrenched. Difficult territory. And plenty for the Bank of England to ponder whether to bring its rate tightening cycle to an end.
Last week saw a plethora of key economic releases, what’s the gist of it? Still a mixed picture. Chinks of light in some areas, but telltale signs of mounting challenges in others. Retail spending was down despite the seasonal boost one would expect from end-of-year holidays, higher rates are crimping demand for credit and dragging down the housing market. Granted, consumer prices are in retreat but too slow for now to actually make a difference on living standards.
Two weeks in and has the bad news poured in? Well not yet, but there’s plenty to be concerned about. Did the UK end 2022 with a recession? It may have just been averted (not so in NI). But the base case is it has only been delayed. What’s certain is that the cost-of living crisis is far from over, and borrowing costs will rise further before they come down. Businesses and mortgage owners, brace yourselves. The good news is the £600 energy vouchers for local households are in the post. But there’s still a long and bumpy ride left to run.
DECEMBER PMI: Today sees the release of December data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – pointed to a difficult end to 2022 as new orders fell sharply again and the rate of decline in output accelerated. Employment was unchanged, following 21 months of job creation. Meanwhile, inflationary pressures moderated.
Northern Ireland’s private sector started last year in expansion mode as the post-pandemic economic recovery gathered pace. Last January, businesses were optimistic for the year ahead with the expectation that growth would continue. This proved not to be the case. Largely as a result of the Russian invasion of Ukraine, which added fuel to the cost-of-living crisis, growth petered out and confidence ebbed away. Northern Ireland’s private sector therefore ended the year on a much more negative note. December saw output and orders fall for the eighth successive month. The contraction in output was the steepest in a decade outside of lockdowns. All four sectors posted declines in output and orders although retail, services and construction firms did increase their staffing levels. The good news is that inflationary pressures moderated with firms reporting the weakest rise in input costs in 22 months. As a result, firms raised their prices at their slowest pace in almost two years. But these price rises still exceed anything that occurred in the pre-pandemic era. This time last year, firms were braced for a challenging year, but it turned out much worse than anticipated. December’s report suggests that negative sentiment is receding and that we may have passed peak pessimism. This year, expectations for the 12-months ahead are low but we could see the converse of last year with expectations being exceeded this time around.
The main findings of the December survey were as follows:
The headline seasonally adjusted Business Activity Index fell sharply to 41.6 in December from 46.0 in November, pointing to a much faster reduction in output in the private sector at the end of 2022. In fact, the decline was the steepest since February 2021. The cost of living crisis was reportedly a key factor behind the drop in activity as new orders continued to fall sharply. Activity decreased across all four broad sectors covered by the survey, with the fastest reduction in construction.
Employment was unchanged in December, thereby ending a 21-month sequence of job creation. While some firms were able to expand their staffing levels, others reported voluntary resignations and difficulties recruiting. There were further signs of inflationary pressures moderating in December, with both input costs and output prices rising at the slowest rates since early-2021. That said, prices continued to increase rapidly. Where input costs were up, panellists mentioned higher costs for energy and transportation. Suppliers’ delivery times continued to lengthen, with delays linked to Brexit and postal strikes. Although companies remained downbeat on the prospects for output growth during 2023 due to the cost of living crisis and political uncertainty, sentiment improved to an eight-month high.
