Chief Economist’s Weekly Brief – Pitch a curve
Consumers have been driving the recovery in developed countries. But signs of fatigue are beginning to show. With much of the initial pent up demand sated and labour market stress building, policy makers are increasingly being called upon to do the unexpected. Is the Bank of England finally coming to terms with negative rates?
Expect the unexpected. The economic recovery in recent months has been stronger than initially anticipated. Not surprisingly, the Bank of England’s assessment of the economy’s health turned somewhat bullish. And the Committee unanimously voted to keep the Bank Rate and target for stock of asset purchases (QE) unchanged in its September meeting. But the Bank did throw a curve ball. Citing downside risks to growth (read Covid and Brexit), the Bank plans to explore negative Bank Rates. While policymakers get their head around this, the market implied path for Bank Rate turned negative!
You’re welcome. August saw CPI inflation dip to a near-five year low of just 0.2%, down from 1% in July. The popularity of the Eat Out to Help Out scheme lay behind the sharp decline, with enough discounts to create temporary deflation in the catering sector. So remember to thank Mr Sunak if your personal ‘consumption basket’ included lots of meals out last month. With a resurgence in virus cases and local lockdowns weighing on demand and Ofgem primed to cut the energy price cap next month, inflation looks set to remain subdued for the time being.
Decoupling. The UK labour market headline indicators continued to be in impossibly rude health in July, with an unemployment rate of 4.1%. But PAYE data shows the number of payroll employees are still 2.4% below pre-Covid level, this is after counting in the furloughed workers. ONS has admitted to limitations in data collection process as telephonic interviews have skewed the sample in favour of homeowners vs renters, the latter being in a more vulnerable spot. A reality check comes from the timelier BICS survey which continues to show c.10% of workers furloughed and redundancies on the rise.
Va va voom. How ‘V-shaped’ the recovery is varies by what you’re viewing. A strong contender for the most V-like is retail sales. The volume of sales rose by 0.8% in August and are 2.8% higher than a year ago. They are also 4% higher than in February. Yet despite this, COVID-19 has changed the way we shop and what we buy. So, non-store (mainly internet), food shops (mainly supermarkets) and home goods outlets are enjoying higher sales. Most others are struggling, especially clothes shops. We’re choosing tellies over trousers and lights over tights.
Getting moving again. Steadily and slowly the commute is making a comeback. In the 2nd week of September 62% of UK adults travelled to work at least once, whilst 20% worked from home exclusively. The end of summer holidays and the return of schools appear to have prompted more mobility, with car traffic now just 3% lower than pre-pandemic levels. But don’t assume that this is simply a slow journey back to normal. In the same period retail footfall actually fell slightly, down to 72% of normal levels, vs 75% the previous week. While shoppers appear to have reached their new normal, many other areas of life remain far from it.
The new normal. Business activity picked up between early August and early September, according to the Bank of England’s regional Agents, but conditions remain very challenging. From a sample size of over 700 businesses, several reported investment decisions being cancelled or postponed. And prices are likely to remain sticky. While most firms had brought the majority of the furloughed workers back to work, some firms are planning redundancies later this year. A growing number of companies don’t expect their staff to return to city centre offices until 2021.
Lower for even longer. As was flagged at the Jackson Hole meeting, Federal Reserve Chair Jay Powell confirmed a new long-term monetary policy framework at September’s meeting, namely an average inflation target (AIT). US inflation will be allowed to overshoot its 2% target after undershooting recently. The Fed stated three conditions are now needed for a rise in US official interest rates: (1) “maximum” employment; (2) inflation rises to 2% and (3) inflation is “on track to moderately exceed 2%”. The Fed’s so-called “dot plot” revealed one member expects a rate hike in 2022, and four look for the first rise in 2023. Higher US rates appear a distant prospect.
Joining in. Chinese consumers were able to lend a helping hand to the recovery last month, amid a continuation of a loosening in Covid-related restrictions. Retail sales posted a year-on-year gain for the first time since the pandemic struck, rising by 0.5%. Eating out and fuels aside (which continued to decline) there was growth across the board with cars, cosmetics and clothes all rising compared to August 2019. Even cinema-goers chipped in. August’s box office revenues were estimated to be 90% of the previous year’s figure.Not bad in this climate.