Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
UK retail sales surge as highstreets reopen
With non-essential shops re-opening their doors in April, non-food store sales surged 25.4% compared to the prior month. Overall, retail sales excluding fuel were up 9.0%, a marked increase from March’s 5.1% gain. Interestingly, the surge in physical store sales did not come at the expense of non-store (i.e. online) retailing, which rose by 1.0% in April. Retail sales volumes are now more than 10% above pre-pandemic levels and online sales remain way above at more than 50% above pre-pandemic levels.
UK inflation boosted by “re-opening” components
UK inflation, as measured by the headline CPI rate, rose from 0.7% to 1.5% in April versus the year before. Inflation, as measured by RPI and includes the cost of housing, jumped from 1.5% to 2.9% over the same period. Key drivers for both included petrol, utilities, clothing, food, and furniture. Core CPI (which excludes food and energy prices) rose a more modest 0.2% to 1.3% over the year.
We expect headline inflation will continue to increase throughout 2021 due to rising energy prices. However, in terms of interest rate implications, we don’t expect this to have much of an impact on the Bank of England’s policy as that will be dictated more by core (ex food and energy) than headline price pressures.
UK unemployment fell and pay rose, but “inactivity” remains high
UK unemployment fell to 4.8% in March and growth in regular wages (which excludes bonuses) rose to a 13-year high of 4.6% in the first three months of this year. However, during this time inactivity (which measures people of working age who are neither employed nor seeking employment) has risen and the number on furlough (2-3 million) greatly exceeds the number of job vacancies (approximately 657,000). To put in a wider context, 13% of the UK workforce is currently furloughed, which is a much higher proportion than other major European economies.
UK business confidence reaches new heights
The UK services PMI rose from 61.0 to a fresh cycle high of 61.8 in May, markedly above the low point of 13.4 seen in April 2020 and signalling rising business confidence and expectations for growth. The UK’s reopening and subsequent boost in spending by consumers and businesses were key drivers of the rise.
The manufacturing PMI also registered a remarkable rise from 60.9 to 66.1 (32.6 in April 2020) – reflecting the reopening of the UK economy, an easing in Brexit-related complications, and improving demand from the US and China. The composite PMI hit 62.0, the highest level since 1998.
US and European business confidence also high
In the US, the manufacturing PMI increased from 60.5 to 61.5 in May and the services survey jumped from 64.7 to 70.1, marking all-time highs in both. The Euro area composite flash PMI increased by 3.1 points to 56.9 in May, well ahead of consensus, with the gains driven by countries other than Germany (particularly France and the periphery).
Equity markets were choppy and mixed over the week, with some negative spillover on sentiment from the disintegration of cryptocurrency markets over the week (Bitcoin fell almost 30% over the week and Ethereum was down 40%). In defiance of the gallons of journalistic ink spilled in connection with the market’s “inflation fears”, government bond yields were slightly lower and inflation breakevens materially tighter over the week.
Next week is a relatively quiet week for economic data so we’ll be focussing on whether the recent crypto crash is representative of risk appetite more broadly. We’ll have an eye on Germany and its IFO business survey and durable goods orders. In the US, we’ll be focussing on core PCE inflation data.
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