Macro Blues & Micro Bounce?

Business activity in the southern regional economies has been in decline since August, (see chart below – recent PMI readings less than 50).  Although SW England still has the lowest UK unemployment rate (ONS 2.1%, three months to November), the highest employment rate (79.3%) and the lowest inactivity rate (18.9%), the latest regional survey (from Nat West/S&P) shows SW orders, employment and exports falling through to the end of 2022.
As interest rates climb and real incomes slide, creditors and debtors are tightening their belts.  The housing market is sagging.  Over the festive season, retail sales volumes were fair, but the lack of consumer confidence (lowest readings on record) does not augur well for activity in early 2023, especially with household savings ratios being under pressure from the cost-of-living crisis.  Will precautionary savings pick up now?  For the long term, this would be good – making funds potentially available for productivity enhancing investment.  In the short term, however, it might take spending out of current demand.  This should be part of a necessary adjustment to relieve the stagflation economy, but it would not be pleasant for businesses and markets right now.
SW and SE PMI measure of business activity to December 2022

The official inflation measures are still high (CPI 10.5%, CPIH 9.2%) in the year to December, but there are tentative signs of some price pressures easing, with the world wholesale gas price back to pre-Putin levels.  Are we at a turning point or just a pause?  Much depends on three elements: domestically, on how the myriad labour cost disputes resolve; internationally, on how the Ukrainian war evolves; and financially, on how further tightening of monetary policies by the central banks is paced and scaled.  Meanwhile, as well as energy prices dropping, other commodity and shipping costs may be easing towards lower inflation but beware a Russian spring offensive.  Food prices continue to accelerate, (reaching +16.9% year-on-year to December).  Overall, ‘core’ inflation may be starting to soften, albeit slowly, from the recent peak.

Against this background, January’s keynote speech by Chancellor Jeremy Hunt set out the government’s plans to boost economic growth.  The Chancellor identified “four Es” (enterprise, education, employment and ‘everywhere’) as agendas in need of improvement if we are to address poor UK productivity, skills gaps and low business investment.  Hunt spoke of opportunities to use the regulatory freedoms of Brexit to boost sectors including technology, life sciences, clean energy, creative industries and advanced manufacturing.  He talked of lower taxes in the medium to long term and the need to address structural labour shortages.  The Chancellor did not ease, however, the general concern about the UK’s absolute and relative economic performance.  Afterwards, business representatives, from CBI and FSB alike, criticised the lack of policy detail in the speech.  Many hope that March’s budget will provide important details for action to quell inflation and yet support growth: no mean feat.

On 2nd February, the Bank of England raised base rates to 4%.  The UK’s ‘stagflation’ problem remains and further increases in interest costs are possible, despite, (indeed, to ensure), the recession risk.  IMF Forecasters are predicting a UK recession – (the only major economy predicted to experience negative growth in 2023).  This prospect reflects the country’s relatively high exposure to dissonance in its supply chains and workforce flows.
With respect to labour, there is clear demand for two broad types of skills.  First, there are those skills which are commonly required across places, sectors and occupations.  These include a range of basic digital, services and, perhaps, green competences which nearly all workers will need to demonstrate to employers: abilities in using foundational and advanced software and awareness of relevant drivers of energy and material sustainability.  Second, there are the specialised skills needed in specific industries or for key functions.  These include parts of finance, manufacturing and/or certain services where innovation drives overall growth and business and personal success.  Areas such as AI, automation and energy/climate substitution are part of this category.

In its current cycle, the UK economy is a low productivity enterprise with weak competitiveness.  A recent FT column has listed the following areas as those holding back the UK economy: disruptive tax and regulation systems; poor management and planning; weak educational performance, inadequate skills and inequality; trade barriers and low investment; skewed business finance and regional disparities; short termism, imbalanced innovation and disjointed politics.

That’s quite an agenda of areas needing improvement in the years to come.  It took at least a decade and a half to get into the present situation.  The task, to lift the structural macro blues and build on any tactical micro bounce, starts now.

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