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26 October 2020: Showing up

The latest brief from the bank’s chief economist.

Last updated: 26 Oct 2020 5 min read

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Retail sales may look strong, but that can’t mask the pronounced weakness in other parts of the economy, especially with second-wave restrictions pulling down on the recovery. The government stepped in with more policy support last week. The Bank of England might just have to follow suit.

TVs over trainers

Our inability to spend as freely on consumer services as normal continues to be to the benefit of many retailers. Sales rose 1.5% in September from August, well ahead of expectations. After the virus-induced slump of Q2, retail sales have just completed their best ever quarter and are almost 5% above their pre-pandemic level. We’re spending more on food (3.7% above the pre-Covid level), a lot more on household goods (11% above) and, with many of us spending far more time at home, we’re spending less on clothes (down 12.7%), save the odd nice top for Zoom calls!

Slowing down

As new local restrictions are being introduced in more areas, behavioural changes start showing up in national surveys. During the week ending 18 October, overall footfall decreased to below 70% of its level in the same period of the previous year. Footfall decreased in all regions of the UK, with the largest decrease in the East of England and Northern Ireland. The proportion of adults that travelled to work has decreased by 5 percentage points to 60%. And the proportion of those working exclusively from home has increased to 25% – the highest since the beginning of August.

Reality check

While some indicators of consumer spending look robust, external Monetary Policy Committee member Gertjan Vlieghe last week pointed to those for investment and employment remaining “quite weak”. And with inflation already low, the signs are pointing to a longer period of weak inflationary pressure. His speech also contained a poignant reminder that, despite the recovery to date, we are still not even at the bottom of the financial crisis. Sobering checks on the challenge ahead. For those setting monetary policy, it points to more stimulus. Could that be negative rates? Yes, potentially. With evidence that there is a positive effect in other countries that have gone negative, there is a case for serious consideration in the UK.

Here we go again

The Purchasing Managers’ Index (PMI) gave another indication that the economy is losing steam. The flash composite reading fell to 52.9 in October (from 56.5 in September) as the surge in new coronavirus cases led to tighter restrictions, limiting the overall recovery. Already ailing sectors like travel, leisure and hospitality were left more vulnerable, with fears of worse to come should restrictions persist. Manufacturing fared slightly better, with pent-up demand and new export orders keeping production steady. However, with cases still rising and Brexit fears lurking, the challenges faced by businesses are pronounced.

More generous

The Job Retention Scheme (JRS) expires this month. In its place comes the Job Support Scheme and, as of last Thursday, with enhanced incentives to retain staff. The employer contribution for missing employee hours is down from 33% to 5% with government chipping in 62% of the missing hours. Minimum hours has also fallen to just 20%. It markedly changes the calculus compared with how the scheme was originally conceived. Time will tell on the scale of headcount reduction as the JRS ends and consumer-facing services feel the bite of new restrictions, but this should better limit the fallout.

A global pandemic?

The housing market didn’t get the memo. Prices rose 2.5% year on year in August with the average price of a home now £239,000, up 3.6% since just before the pandemic struck. And, given the index represents completed transactions, it doesn’t yet reflect the fillip from the cut to stamp duty. The mini-boom has some room left to run. But it’s not without its risks. Waning momentum in the economy, the expected rise in unemployment and higher mortgage rates are all threats.

Oceans apart

Business surveys tell a tale of two continents. Where US firms are bullish, their eurozone counterparts warn of an economy heading the wrong way. The US all-sector PMI reached 55.5 in October, up from 54.3 in September and the best reading in 20 months. The reading for eurozone was a sobering 49.4, the lowest in four months and below the magic 50 mark and so formally flashing a recession. Covid probably means we need flexibility in our interpretations of the PMI. But the worry is that the eurozone is a canary in the UK’s mine.

Buoyed

UK consumer prices increased 0.5% year on year in September, compared with 0.2% in August. Public transport use continues to remain substantially below pre-Covid levels, with people preferring travel in personal vehicles. So it wasn’t surprising to see prices for (second-hand) cars being the main contributor to the increase. And of course, it was aided by the post-Eat Out to Help Out increase in prices of catering services. On the other hand, furniture, household equipment and maintenance pushed the index down. All said and done, with plenty of spare capacity and restrictions limiting large swathes of spending, inflation is unlikely to move much higher any time soon.

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