Economic Highlights

There was little ONS economic data released last week. Attention was mainly focused on the final December PMI prints, where we witnessed a slight drop in the Services reading, from 49.4 to 49.4. That was hardly surprising in light of Covid developments. Indeed, Covid will continue to be the primary driver of the data in the coming weeks, and we should brace ourselves for a further setback. The latest restrictions suggest that January GDP will once again turn negative (December hangs in the balance), meaning a double-dip recession. However, we continue to note the support offered by government whenever new restrictive measures are put in place – last week to the tune of another £4bn+. There is already talk of the Bank of England raising its asset purchase ceiling yet again to accommodate more government spending. This will remain a feature of the Covid economy.

The monthly Payroll data saw net job losses of 140,000, which looks like a poor end to the year. However, markets were relatively relaxed, owing to the concentration of job losses (498,000) in the leisure and hospitality sectors. These were a direct result of Covid-related restrictions, and therefore viewed as temporary. Perhaps surprisingly in the circumstances, Retail sector employment rose by 120,000. There is bound to some monthly volatility as new measures are put in place, but the underlying trend of employment growth should remain positive as more vaccines are distributed. The unemployment rate, steady at 6.7%, suggests plenty of slack left in the economy, and should help to allay concerns about inflation risks, even if the headline inflation numbers will look pretty strong in Q2 (+2.5% y/y) once we lap 2020’s trough.

As in the UK, December’s final Eurozone PMI readings drifted lower. Manufacturing fell from 55.5 to 55.2 (but still in expansion territory), while Services fell from 47.3 to 46.4. More positively, headline Unemployment declined from 8.4% to 8.3% in November, but there is still a lot of slack being taken up by furlough-type schemes. An economic Confidence indicator rose from 87.7 to 90.4 in December, bolstered by the US election result and ratification of the EU’s stimulus package. However, January might look less rosy following the latest Covid developments.

The latest PMI also slipped a little, with the official Composite reading falling from 55.7 to 55.1, and the Caixin from 57.5 to 55.8. Meanwhile both the CPI (+0.2% y/y) and PPI (-0.4%) came in above expectations. While the readings remain low, there might be some concern about the future impact of rising food and hard commodity (eg iron ore and copper) prices. The government has been gently tightening policy, but we don’t expect it to strangle the life out of the economy – more to continue to lean on speculation.