Chief Economist’s Weekly Brief – Go big and fast
Acknowledging the damage inflicted by the crisis, and the lessons of recent years, central bankers are fine-tuning their tools, downgrading inflation worries and putting more weight on boosting employment. Easy monetary policy is here to stay.
Easy does it. No one expects central banks to tighten monetary policy in the near future, but if recent speeches delivered at the annual central banking conference in Jackson Hole are anything to go by, it will be even longer before rates are rising. US Federal Reserve Chairman Jerome Powell announced changes to its monetary policy framework that meant rates will stay lower for longer. The twists were an emphasis that it would seek to make up for a period of inflation undershooting its target by then overshooting. Plus a rephrasing of its jobs-related target to stress that it was only concerned about employment being too low, not to high. The Bank of England Governor Andrew Bailey struck a similar note when he reflected that his institution could have acted faster and more boldly in the past.
Getting there. The level of activity keeps increasing across the UK. This is evident in the recent statistics on customer activity. Overall footfall in the third week of August was around 70% of the level seen last year. At the beginning of April, it dropped to around 20%. Retail parks already reached the 90% level, while high street (60%) and shopping centres (70%) are still behind. We are moving around more as well. All motor vehicle traffic was just 6 pp lower than traffic seen in the first week of February. We are getting closer to business as usual.
Retrenchment. The CBI’s latest monthly Distributive Trades Survey dampened recent optimism on the high street, which has been fuelled by the reopening of the retail sector. The CBI’s sales balance dipped to -6 in August, after improving markedly to 4 in July (the highest level since April 2019), from the low of -37 in June. This is despite anecdotal evidence of the success of the “eat to help out” scheme” for restaurants. The latest CBI survey showed retailers shedding labour at their fastest pace in August since summer 2009. With the furlough scheme ending in October, further job cuts are likely in coming months.
La cuenta por favor. As the Eat Out to Help Out Scheme draws to a close it’s clear that it has helped galvanise the recovery in hospitality. Last week restaurant bookings were double their level of the previous year. The question is whether the experience has given patrons confidence to readopt their old eating out habits. Time will tell. Buoyed by the tangible improvements, many restaurants are sticking with the offering through September. And perhaps there has been another benefit. Seaside towns and smaller cities appear to have benefitted more significantly. A fillip for urban regeneration?
Ain’t flowing. Both labour markets and oceans are driven by powerful flows; how could our careers progress without mobility? So interrupting flows cause damage. The share of transfers this year has been broadly the same as it was in 2019 (6.1% vs 5.7%). So maybe the job retention scheme has not significantly changed the flow of workers. Yet given the enormous upheaval in jobs, flows should be higher, suggesting the job schemes has reduced labour mobility. Also important is that moves are more prevalent among the higher skilled. Another example of the uneven effects of Covid.
Here today, gone tomorrow? Net migration hit the highest level seen since early 2016, driven by rising numbers of non-EU nationals coming to study in the UK. In the year to March, 313,000 more people moved to Blighty than left. Increasingly, new arrivals hail from China and India rather than EU countries. Don’t expect high levels of net migration to be sustained through 2020 though; virus-related restrictions on international travel have severely disrupted people flows. Since the pandemic struck, the number of passenger arrivals has slumped by 97% and visitor visas are down 99%. Will students return?
Sobering. UK car production data provides a useful handle on two things. First, the health of the manufacturing sector and second, the strength of external demand as the vast majority (c.84%) of the output is destined for foreign markets. July data painted a mixed picture. While monthly production increased at a healthy clip, the year to date change remained 40% below. But foreign demand held up relatively well. The tricky part here, in the event of a no dearl Brexit, is that majority were destined for the EU (55%).
Picking-up. After the record slump in April, Euro area’s economic sentiment index has been on the rise for four months in-a-row. While August’s reading of 87.7 was still 15% below February’s pre-lockdown level of 103.4, 60% of the cumulative fall in confidence in March and April has been recouped so far. The pick-up in confidence was most marked amongst retailers & services firms. Country-wise France, the Netherlands and Germany posted the biggest gains in sentiment with confidence also improving in Italy. But a resurgence of COVID-19 cases in Spain saw confidence dip