Economic Highlights

The Bank of England’s Monetary policy Committee left policy unchanged at its latest meeting, although there is still widespread expectation that the celling for asset purchases will be raised in the Spring, possibly to the tune of £100bn. The final readings from January PMIs were not quite as bad as the flash data, although the Services sector (39.5) remains in difficulty. Similarly the Composite reading (41.2) reflects the effects of tighter restrictions in the economy.

January’s Non-Farm Payrolls rose by 49k on the month, well below the consensus of +105k. Net revisions to the previous two previous months were also negative, down by 159K. The unemployment rate (which is subject to a different methodology) fell to 6.3% from 6.7%. Average Hourly Earnings rose by 0.2% on the month, 5.4% on the year (reflecting that it is lower-paid jobs that have been lost). The tone of the report disappointed, but this probably represents the short-term trough, and the focus will now shift to the big fiscal stimulus package, which the Biden administration is pushing through Congress.

The final outcome for Q4’21 euro zone GDP was a decline of 0.7%, a stark contrast with the rebound-driven +12.4% recorded in Q3. That left the overall size of the economy 5.1% lower than at the end of 2019. This sets the EU up for an official “double-dip” recession, given prolonged restrictions in Q1’21, although, in reality, markets will ignore the headlines and focus much more on the incipient seasonal and vaccine-driven recovery in Q2/Q3.

The latest Services PMI reading disappointed, falling from 56.3 to 52.0. That would appear to reflect a combination of increased localised restrictions on movement following Covid outbreaks, as well as the government’s continuing policy of damping speculative activity, especially in the housing market. A slight tightening of monetary policy is evident. However, we continue to believe that underlying domestic consumption growth will be supported, and that the plan is not to knock the stuffing out of the economy.