Rates, Seasonal Spending and Covid Concerns
An unambiguously strong labour market release has emphasised that December’s Monetary Policy Committee (MPC) meeting is very much live. A repeat of this strength in next month’s release, which will be published two days before the MPC’s decision, could easily be enough to generate a majority for a pre-Christmas rate hike.
A strong retail sales outturn for October and an improvement in consumer confidence will also provide some encouragement to those MPC members worrying about slowing growth. That said, the real income squeeze still has further to run, with CPI inflation remaining on track to hit 5% in April.
For several months, the MPC has been clear that a rate hike is coming, but first it must be satisfied that the end of the furlough scheme did not cause a sharp rise in unemployment. Its caution was largely borne out of the fact that furlough usage was surprisingly slow to fall during the summer, after the economy had reopened. But the first hard evidence was indicative of the softest of landings.
HMRC reported that the number of employees paid through the PAYE system rose by 160,000 between September and October. While the ONS cautioned that some of those made redundant may still feature in the PAYE series for a few months until they’ve worked out their notice period, the impact of this possibility should be modest. With data for Q3 reporting a big drop in unemployment and a record level of job-to-job moves, and with unfilled vacancies setting another new high, this was and undeniably strong labour market report.
This week’s economic data confirmed that the economy got off to a strong start in Q4. Retail sales rose 1.7% in October as consumers boosted their spending in almost all categories. However, this uptick could prove temporary.
Households may be unhappy about many things, but stronger-than-expected retail sales for October suggest a blockbuster holiday shopping season is in the offing. Still, consumers are getting less bang for their buck, thanks to surging inflation that accounted for more than half of the sales increase.
What’s more, there is the question of how much of the sales strength reflects early holiday shopping by households concerned that there will be a lack of goods available as we get closer to the holidays. If consumers pulled forward purchases, there might be a payback in November and December, resulting in weaker seasonally adjusted sales for those months.
As Coivd-19 cases continue to rise in Europe, some governments have started to introduce restrictions, while others have been discussing potential measures. I expect targeted measures across some countries according to public health figures, but other factors (such as domestic political situations) will also be relevant.
The major risk here is not only growth, which will be directly affected by government decisions, but also consumer confidence. With private consumption expected to be the major contributor to growth next year, looming decisions on restrictions do not bode well for the European outlook.
Author: Tom McGrath.
This financial market commentary is for the week commencing Monday 22nd November 2021.