As Chancellor Rishi Sunak delivered his second Budget of 2021, the UK economy is (once again) at a pivotal moment in the post-pandemic recovery. Rising inflation is probably the biggest concern for consumers and policymakers, but there is a long list of anxieties, including the end of the furlough scheme, tax rises and of course the resurgence of coronavirus over winter. We’ve picked five charts that provide a snapshot of where we are now, including inflation, GDP, jobs and retail sales.
Let’s tackle the big one first: inflation. This isn’t just a UK concern, of course, as rising energy prices and supply shortages mean that the cost of living is rising sharply everywhere. The key phrase that policymakers have been holding on to is “transitory”. Now the Bank of England is forecasting inflation at 5% next year (from 3.1% in September on a CPI basis) and experts are scrambling to bring forward expectations of interest rate rises. Monetary policy is often used to tame inflation, and with interest rates at a record low of 0.1%, there is room to put rates up incrementally. But the UK economy has got used to cheap money, from mortgages to car loans, so the Bank’s policymakers will not want to be accused of killing off the consumer-led recovery. Looking at the chart, inflation worriers could be reassured by the fact that whenever consumer price inflation has hit 5%, it has fallen back sharply again.
The UK economy crashed last year – the worst performance since 1709 – then rebounded sharply as the economy re-opened again. The zigzag on the chart has distorted the scale but prior to the pandemic UK economic growth has been fairly tepid since the financial crisis. This Budget will see a prediction from the independent Office for Budget Responsibility on economic growth this year and the coming years. These numbers are largely noise to equity investors but last year's crash means the recovery is being closely watched. The Bank of England, in August, predicted that the UK economy will grow by around 5% this year, although other estimates suggest this growth could be as high as 7% if we get stronger Q3 numbers, which come out on November 11. A economy that’s in good shape could probably absorb interest rate rises, but are fears that “stagflation” could become a problem – a stagnant economy combined with high inflation.
The UK job market has proved surprisingly resilient, thanks in no small part to the furlough scheme, which ran out after 18 months on September 30, having helped millions of UK workers. There’s now talk of record labour shortages in certain sectors, which in theory should improve the bargaining power of new employees. This chart shows the staggering recovery in the jobs market after 2020, and how the number of “payrolled employees” is now above 2019 levels at just higher than 29 million people. There is a range of employment data, from earnings to unemployment claimant count. Most of these have a decent timelag (the unemployment figures run from June-August), so it’s hard to say exactly how the job market is faring post-furlough. The ONS warns that the September 2021 payroll data is subject to change. Some of the Budget announcements that have already been leaked are jobs-related, one of which is a rise in the national minimum wage to £9.50.
Much was made last year of some Britons’ ability to save cash in lockdown, and the theory is that some of this money has yet to be spent. Not least because there are still bottlenecks in supply chains – so there are long waits for the likes of sofas and electric cars. The chart shows the expected dip last year as shops were shut, but retail sales in September 2021 were 4.2% higher than in February 2020, before the pandemic. The rebound has not been even, especially with the early 2021 lockdown returning, but the trendline is positive. September 2021 showed a month on month softening though, with some economists saying that fuel shortages could have limited shoppers’ movement. Retailers are braced for an online sales tax, but not a much-hoped for reform of the controversial business rates system.
Investors, both large and small, can scour the economic data all they like but it won’t tell them whether the UK equity market is a buy, and which stocks are likely to outperform. The UK has some legacy issues that deter asset allocators, and fears over shortages of petrol and Christmas turkeys are unlikely to persuade the neutral observer that Brexit “is behind us” (my colleague Dan Lefkovitz has looked in detail at the case for the UK). Our Covid-19 vaccination programme was the envy of Europe for a while but rising cases have taken the shine off that progress. Do equity investors really take the national mood into account? Looking at the Morningstar UK index and its snapping back to the trend line, the answer is: probably not. Upbeat global markets help of course, and the UK has plenty of the resource-heavy stocks that were out of favour last year and are back in favour in 2021. BP and Shell still dominate the index, and the oil price has doubled since the start of the year. The Morningstar UK Index is up more than 15% this year after a fall of 11% in 2020.
