HEADLINERS: Main Economic Developments

• UK unemployment rate: Unemployment fell from 4.26% in Sep-21 to 4.20% in Oct-21 while job vacancies reached a record high of 1.22m for the quarter Sep-21 to Nov-21
• Inflation: Consumer Price Inflation (CPI) increased to 5.1% in Nov-21 while Producer Price Inflation (PPI) rose to 9.1%
• Exchange rates: GBP appreciated slightly v EUR from 1.17 in early Nov to 1.19 in late Nov before returning to 1.17 in December; GBP depreciated v USD from 1.36 in early November to 1.32 in December
• UK and US stock indices: Major stock indices dipped in end-November following Omicron discovery although FTSE 100 & FTSE 250 made slight recoveries in mid-Dec following BoE’s decision to hike interest rates
• Oil prices: Spot oil prices were around c.$70 per barrel in early mid-December 2021, a decrease from the previous month, largely due to the increase in market uncertainty with the rise of the Omicron variant
• Purchasing Managers’ Indices (PMIs): Manufacturing and Construction PMIs rose in Nov-21 and reached the highest levels for 3 and 4 months respectively while Services PMI dipped slightly
• Consumer Confidence Index: The GfK Consumer Confidence indicator dropped 1 point from -14 in November to -15 in December, with rising concerns over Omicron and inflation

Unemployment

Figure 1: Unemployment fell from 4.26% in Sep-21 to 4.20% in Oct-21 while job vacancies reached a record high of 1.22m for the quarter Sep-21 to Nov-21

 

ONS data show a Labour market which continues to be very tight. Unemployment rate fell from 4.26% in Sep-21 to 4.20% in Oct-21, the lowest level since the quarter beginning in April 2020. The number of job vacancies posted, meanwhile, sustained its spike. Vacancies reached 1.22m for the quarter Sep-21 to Nov-21, a massive increase of c.402,000 on pre-pandemic levels in the quarter Dec-19 to Feb-20, and a record high. Growth was driven from almost all sectors, with 13 of the 18 of the ONS industry sectors posting an increase in vacancies.

The ONS, however, indicate that the pandemic has had a negative impact on employment rate. Indeed, they point out that the number of jobs remains below pre-pandemic levels in some sectors, including Manufacturing, despite recent growth.

Inflation

Figure 2: Consumer Price Inflation (CPI) increased to 5.1% in Nov-21 while Producer Price Inflation (PPI) rose to 9.1

Note: Producer Price Inflation (PPI) is now calculated with the annual chain linked methodology and headline indices on a gross sector basis, both of which have been reflected on the above chart

After decreasing a little in the year to September, Consumer Price Inflation (CPI) experienced an increase again to 5.1% in the year to Nov-21. This continued an extended upward trend, beginning around a year ago, bringing CPI to more than double the Bank of England’s 2% target. The largest contributors were ‘Transport’ (1.34 pp) – a major contributor to inflation volatility throughout the pandemic – and ‘Housing and Household Services’ (1.28 pp). The former relates to the increase in petrol and second-hand car prices while the latter is caused by price increases for gas and electricity following Ofgem’s rise in energy price caps in Oct-21.

Producer Price Inflation also continued to rise, reaching a level of 9.1% in Nov-21, unprecedented in recent years. ‘Transport Equipment’ contributed 2.57 pp to the increase, whilst ‘Metals Machinery and Equipment’ (2.12 pp) and ‘Other Manufactured Products’ (1.97pp) were also major contributors. Similar to last month, the only ONS category to experience a significant decrease in rate of price increase was ‘Chemicals and Pharmaceuticals’ of (0.15)pp.

Exchange Rates

Figure 3: GBP appreciated slightly v EUR from 1.17 in early Nov to 1.19 in late Nov before returning to 1.17 in December; GBP depreciated v USD from 1.36 in early November to 1.32 in December

The GBP appreciated slightly v EUR from 1.17 in early Nov to 1.19 in late Nov before returning to 1.17 in December. GBP depreciated v USD from 1.36 in early November to 1.32 in December.

The Poundsterlinglive website attributed GBP’s depreciation v EUR to the roll-back of the European Central Bank’s quantitative easing programme. Currencylive website added that lower business confidence and High Street footfalls amid Omicron-related uncertainties further contributed to the depreciation.

In regard to GBP v USD, the DailyFX website attributed GBP’s depreciation to the lower-than-expected Q3 2021 GDP growth of 1.1% v forecast 1.3% and the uncertainty over Omicron.

Stock Indices

Figure 4: Major stock indices dipped in end-November following Omicron discovery although FTSE 100 & FTSE 250 made slight recoveries in mid-Dec following BoE’s decision to hike interest rates

The FTSE 100, FTSE 250, and S&P 500 all experienced relative stagnation during November and December overall due to dip during the final days of November. This is likely due to the discovery of the new ‘Omicron’ variant of Covid-19 impacting various industries ranging from energy to the financial services. Since then, each of the markets has rallied, leading to stagnation but increased volatility. In particular, Reuters indicated that the Bank of England (BoE)’s decision to raise interest rates from 0.1% to 0.25% has caused FTSE 100 and FTSE 250 to rally in mid-December. Reuters also added that S&P 500 declined in mid-December following the Fed’s decision to bring forward the roll-back of COVID-19 stimulus.

The prognosis of Omicron on the markets is unclear, since the severity of the variant, magnitude of any central bank response, or government action are all unknown and yet to be priced in.

Oil Prices

Figure 5: Spot oil prices were c.$70 per barrel in mid-December 2021, a decrease from the previous month, largely due to the increase in market uncertainty with the rise of the Omicron variant.

Spot oil prices were hovering at c.$70 per barrel in mid-December 2021, lower than October and November when oil prices surged and traded upwards of US$80 due to low gas supplies across Europe. Market outlook dampened in December due to the Omicron variant which has led to a tightening of restrictions across Europe in response to a large increase in COVID-19 cases.

As 2021 draws to a close, the International Energy Agency (IEA) expects a slower recovery in global oil demand, with further restrictions on travel, jet fuel demand will be most affected. Oil supply however, has increased towards the end of year, particularly from the US where drilling activity has increased.

PMIs

Figure 6: Manufacturing and Construction PMIs rose in Nov-21 and reached the highest levels for 3 and 4 months respectively while Services PMI dipped slightly

Manufacturing and Construction PMIs rose in Nov-21 and reached highest levels for 3 and 4 months respectively while Services PMI dipped slightly from 59.1 in Oct-21 to 58.5 in Nov-21. 

Construction PMI reached a four-month high of 55.5 in Nov-21 which IHS Markit attributed to increased customer spending after the relaxation of lockdown measures leading to more work volumes, particularly for commercial construction. Moreover, the lowest supply delays in 7 months also boosted the industry further.

Similar to Construction PMI, Manufacturing PMI also reached a three-month high of 58.1 in Nov-21. Manufacturing had benefited from higher demand, purchases and employment. IHS Markit added that higher domestic demand and buffer stock purchases resulted in higher manufacturing output. However, longer vendor delivery lead times as well as crunch in staff and materials had held back further growth, a continuing theme from prior months. 

There has been a slight decline in Services PMI from 59.1 in Oct-21 to 58.6 in Nov-21. However, IHS Markit indicated that the Services industry are still performing strongly due to higher domestic and export demand after the re-opening of the economy and relaxed travel regulations. This was despite highest inflationary pressures in more than 25 years amid labour supply crunch and supply chain pressures. 

Consumer Confidence Indicators (*)

Figure 7: The GfK Consumer Confidence indicator dropped 1 point from -14 in November to -15 in December, with rising concerns over Omicron and inflation

The GfK Consumer Confidence indicator dropped 1 point from -14 in November to -15 in December, with rising concern surrounding the Omicron variant which is creating expectations of further restrictions on socialising after Christmas. The GfK also cited inflation and the likelihood of interest rate hikes over the horizon, the first of which has been confirmed by the Bank of England on 15 December, as reasons for the decline in confidence. 

(*)Note: The latest version of YouGov/Cebr, Consumer Confidence Index we can find is Oct-21 which has been covered in the previous Macro Update. 

This post was co-authored by Robyn Arthey, Emerging Market Specialist of the Young Fabian Economy and Finance Network, Matthew Oulton, Secretary of the Young Fabian Economy and Finance Network and Chris Wongsosaputro, Co-Chair of the Young Fabian Economy and Finance Network

If you would like to be involved in the next edition, please reach out to us via the e-mail address [email protected] 

Please keep up to date with the latest trends by following our Facebook page, LinkedIn and Twitter.