Economic Highlights

The labour market deteriorated in November, but less than expected, propped up by government measures. Unemployment in the three months to November rose by 202k, and the unemployment rate nudged up by 0.1% to 5.0%, the highest level since 2016. Wage growth surprised to the upside, with average earnings up from 2.7% (3m y/y) to 3.6% (ex- bonuses also up to 3.6% from 2.8%), reflecting the impact of proportionally greater losses for lower-paid jobs.  Unemployment is expected to rise further as firms respond to balance sheet pressures from prolonged lockdowns and, in time, government support is withdrawn. This should be followed by a vaccine-driven recovery.

The 4.0% annualised gain in Q4’20 GDP was dragged down by a combination of the withdrawal of fiscal support and the resurgence in coronavirus infections. With coronavirus cases now falling and Congress agreeing on a new $900bn stimulus late last year, consumption growth should accelerate again in H1’21. Overall activity levels were still down by 2.5% on a year earlier, but that still represents a much faster recovery than one would initially have expected given how grim things looked in mid-2020. Effective vaccines offer the possibility of 5%+ growth in 2021.

The latest Confidence indices held up well in the face of Covid variants and persistent lockdowns. It would not be a surprise to see a dip in February, especially with the slow vaccine rollout, but the path of recovery is still positive and the ECB, especially, remains fully committed to providing support.

Industrial profits rose 20.1% y/y in December, higher than the +15.5% in November, evidence that China continues to sidestep much of the Covid economic distress. Signs of a tightening in monetary conditions were evident in open market operations last week, exacerbated by cash demands ahead of the month-end and Chinese New Year. However, we continue to believe that this is designed to dampen speculation rather than drastically to weaken demand.