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7 June 2021: Not ordinary

The latest brief from the bank’s chief economist.

Last updated: 07 Jun 2021 5 min read

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Another week of upbeat economic data. Businesses have now joined consumers in setting records for high performance. But the “brightening outlook comes with some discomfort”, as the Organisation for Economic Co-operation and Development describes it. With a surge in the spread of the Delta variant, UK officials are now drawing up a contingency plan for possible delay in 21 June easing.

Chance

The granular impact of Covid echoes earlier ages when people were astonished that plagues could devastate one house while leaving their neighbour untouched. So with confidence in the UK economy rising almost daily, it’s easy to forget that the recovery is not shared evenly. Footfall rose 7% in the week to the end of May, to 73% of its pre-Covid level. Yet while retail parks have returned to 92%, high streets and shopping centres look forlorn at 68% and 67% respectively. Or take job adverts: there’s seemingly endless opportunities in logistics (up c. 300%), while graduate openings languish at 84%.

The business

Ask business leaders about the impact Covid is having and, despite the seemingly ever-shifting epidemiological backdrop, their answers have told a remarkably similar story for the past several months. Both near- and long-term expectations have improved compared with the start of the year. While the virus continues to weigh on sales, estimated to be 10% lower in Q2, it is expected to recover virtually all lost ground over the remainder of 2021, consistent with forecasts of a rapid vaccine-led recovery. Business investment is expected to follow a similarly steep upward path and, along with sales, is actually predicted to be 1% higher from 2022 onwards than it would have been absent Covid.

U-turn

The dip in housing market activity in Q1 is behind us. Approvals rose to 86,900 in April, surprising the consensus on the upside. This is thanks to double good news – the lifting of lockdown restrictions as well as extension of the stamp duty cut. And the strength is likely to be retained over the next few months, as indicated by the Royal Institution of Chartered Surveyors residential market survey and Google trends data on a visit to the top three property websites. But consumers are still not going all out as consumer credit de-leveraging continued.

Greening

Speaking last week, the governor of the Bank of England has said that the primary levers for driving the transition to net zero rest not with central banks. But BoE is responsible for monetary and financial stability. This week it will launch a Climate Biennial Exploratory Scenario exercise to assess the resilience of individual banks, insurers and the financial system to different climate scenarios. And from Q4 it will start adjusting the composition of the portfolio of corporate bonds held by the Bank, in order to incentivise companies to take actions contributing to an orderly transition to net zero.

Heating up

May’s eurozone Purchasing Managers’ Index (PMI) contained a series of record highs – some good and some bad. Manufacturing activity is smoking, having hit a series high of 63.1. Services activity also quickened but hasn’t yet entered the red-hot sixties zone. Last month’s reading of 55.2 was the best services out-turn in almost three years. With firms’ optimism higher than at any time in over 17 years, further improvements are expected. Though strong growth is being accompanied by inflationary pressures. Input cost component has pushed well into sixties. May’s reading of 66.8 marked a 122-month high and led firms to raise their own prices at a record rate.

Overheating already?

With a large proportion of the US population vaccinated, the economy is on track to reopen fully. The optimism is coming through in business surveys. Manufacturing PMI rose to 61.5, the highest since October 2009 on the strength of new orders. Meanwhile, services PMI hit a record high of 64. To add to this, the ginormous $6trn (£4trn) stimulus provided by the government last year is supporting incomes, and, therefore, spending on goods and services. But, with the economy recovering at an extraordinary pace, businesses are struggling to source raw materials and labour, driving up their production costs. Inflation ahead!

Mixed

US non-farm payrolls posted a 559,000 increase in May, below market expectations. The main driver of higher job gains in May was the hospitality and leisure sector, driven by the continued reopening of the US economy. The drag came from decline in hiring in construction and retail. Notwithstanding, US unemployment dropped to 5.8% from 6.1% a month prior. However, a rising concern now is shortage of labour supply. Job vacancies are at a record high and still rising. This has also exerted upward pressure on wages, average hourly earnings rose at a healthy clip, led by the hospitality and leisure sector. Another contributing factor towards build-up of inflationary pressure.

A problem shared

Unemployment is a blight on people’s lives in all sorts of situations, but especially so when no one in a household is working. Unemployment has risen during the pandemic yet the number of households where all adults are looking for work hasn’t increased and remains at a little over a quarter of a million in the UK, close to its all-time low. It seems that most people who are looking for a job are in a household where there is another adult who is still working. The furlough scheme is still doing an important job of restraining rises in unemployment and the real test will come when that support is removed. But in the meantime, this is yet another way in which the pandemic’s impact on the economy has been so different from previous recessions.

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