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The latest brief from the bank’s chief economist.
The lockdown exit roadmap has been set, cautiously but (hopefully) irreversibly. And come 3 March, the chancellor will table the Budget, outlining the future of the government support schemes which have been so effective in preventing a wider economic fallout. But charting a course out from the extraordinary levels of government spending will be challenging. While markets have awoken to such spending levels, igniting inflation down the road.
Government plans to release the country from lockdown are an exercise in acrobatics: balancing greater freedoms with growth in vaccine-induced immunity. Little about England’s lockdown will change this month; the return of schools being a notable exception. But come mid-April, when everyone over 50 has been jabbed, economic life can resume with fanfare. Shops, hairdressers and gyms can reopen; pubs and restaurants can serve outdoors. Indoor service, along with cinemas and hotels will begin mid-May, when second doses will have been administered to all over 70s. And, from late June, the promise of all remaining limits being lifted, paving the way for a strong, sustainable economic recovery. The catch? Nothing is set in stone; all depends on keeping Covid under control.
According to the Confederation of British Industry distributive trades survey, the UK’s retail sales balance increased by five points to -45 in February versus January. Trade volumes also contracted at a softer pace. While the improvement is rather unimpressive, it does chime with other forward-looking indicators on retail spending. For instance, retail footfall rose to 38% of its value a year ago for the week ending 20 February, recovering notably from its lows in mid-January. Similarly, the Bank of England’s card-spending data shows an increase of 9% from its January end levels…
…driven by spending on ‘staples’, with small increases in other categories, as only one in 10 were going out for shopping other than food and medicine. Across all industries, one in five workers are on furlough, with 72% of businesses currently trading and 3% planning to start in the next two weeks. Docks were busier than last week with 332 daily ship visits, 5% below pre-Covid levels. Cases going down, a swift vaccination drive, and increased confidence levels should help these high-frequency indicators to continue to improve in the coming weeks and months.
Activities across all industries
In his latest speech, Monetary Policy Committee member Gertjan Vlieghe noted the wide income distribution of UK household savings. He cited a BoE survey showing the top 40% of income earners saw the largest rise in savings between late August and mid-September 2020. In contrast, the lowest income households have experienced the biggest fall in savings, highlighting diverging trends. The risk is that higher income householders, who tend to also have elevated liquid assets, are less inclined to spend their savings. This would (potentially) reduce the likelihood of a strong rebound in consumer spending over the medium term amid a gradual reopening of the UK economy.
The UK’s unemployment rate reached 5.1% in Q4 2020, inching up from 5% in the three months to November, and the 4% rate it was hovering close to pre-Covid. That represented an employment decline of 114,000 between Q3 and Q4 last year. But it looks like the deterioration is on hiatus. PAYE data – a timelier measure, and one less impacted by challenges of conducting surveys amidst a pandemic – shows that the number of employees rose by 0.3% in January.
At the regional level, the pattern has been one of deterioration, but with varying magnitude. Comparing January 2021 with a year ago, decreases in payrolled employees ranged from 0.8% in Northern Ireland to 5.2% in London. Not surprisingly, London has the highest unemployment rate at 7%, with Northern Ireland the lowest at 3.6%.
As for future prospects forecasters still reckon unemployment will rise from here, reaching closer to 7% by the middle of the year. But an extension/gentle tapering of the furlough scheme (details on which are expected in this week’s Budget), aligned with a successful reopening, raises the chances that more employees can be successfully reabsorbed back into employment.
Slow productivity growth in the UK since the financial crisis got a special name – productivity puzzle. Output per hour grew by only 0.5% per year between 2010 and 2019, compared with 2.1% during the preceding two decades. It was a mere 0.3% last year, falling 1.1% in Q4 2020 when compared with Q4 2019. Sectoral disparities were marked. Productivity increased in Wholesale & Retail (0.7%), Construction (0.3%) and Manufacturing (2%). While Real Estate (-0.8%), Hotels (-0.8%) and IT (-0.5%) fell the most. Getting a clear read on trends amidst a pandemic is certainly difficult. But it would be surprising if the puzzle didn’t remain once the economy recovers.
Tiger by the tail?
Inflation is the tiger whose tail central banks control, noted the BoE’s chief economist Andy Haldane last week. And of late, the tiger has been woken from its slumber by the structural forces of the pandemic and unprecedented levels of government spending. What the future holds is hard to predict. To put it in context, BoE’s inflation chart depicts confidence intervals twice as large as normal. That said, Haldane argues that the risks could be skewed to the upside as resurgent demand (helped by winding down of forced savings) hits against constrained supply (aging demographics, weakening of global supply chains). And to top it all, the psychological scarring of risk appetite is expected to be less, as the pandemic-led crisis differentiates itself from a financial one. Once again, financial markets are leading the way by pricing in rising inflation expectations.
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