U.K. Growth is Slowing but will be over 7.5% this year ... 😄

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Subject: U.K. Growth is Slowing but will be over 7.5% this year ... 😄

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Saturday 11th December 2021

Hi Friend,

U.K. Growth is Slowing ...

But will be over 7.5% this year ...

The latest ONS estimate for GDP growth was released this week. Data for October suggested the economy was slowing down. "Construction slowdown holds back recovery" the headline in the Times. It was a similar story in manufacturing.

The data revealed, the economy grew by just 0.1% in October compared to 0.5% prior month. Construction and manufacturing sectors were hit by supply chain problems and rising material prices. Should we be concerned?

Earlier in the week, PMI Markit data for the construction sector reported the fastest rise in construction output for four months in November. The headline index increased to 55.5 in the month up from 54.6 in October. The index has been in positive territory for ten consecutive months. The bounce back was led by robust rise in commercial work. Supply delays continued to increase but cost inflation dipped to a seven month low.

Looking at the ONS data more closely, we prefer to analyze the year on year rate of growth. It's a house style.

We also model GDP(O) primarily. It's more akin to business modelling as opposed to theoretical expenditure and income models.

Compared to prior year, year on year growth in October was up by 4.6%. Service sector growth was up by 5.4%. The transport sector was up by 9.5%. Construction was up by over 3%. Manufacturing growth was up by just 1.3%.

For the year as whole, we still expect growth of over 7.5% this year and around 5.5% next year, assuming no widespread shock from additional anti omicron measures. The service sector will increase by 5.9% this year. Manufacturing will be up by 4.3% and construction output will be up by almost 20%. You can download the TSE UK Forecast December Slide Deck using the link. It's a sort of Christmas treat!

Businesses, especially in hospitality, travel and leisure are concerned about the impact of Plan B on activity into the New Year. Markets are convinced the December rate rise that never was, will now never take place. Sterling closed up. U.K. bond yields closed down. Why? Don't miss our Monday Morning Markets update. "Any explanation is better than none" Nietzsche.

U.S. inflation hits 6.8% ...

Markets were braced for a rise in U.S. inflation. November data revealed a near forty year high. The headline CPI rate increased to 6.8%.

New car prices increased by 11%. There were significant hikes in energy and gas costs. Prices were rising in household furniture and appliances. Fast food prices were up by 8%. The core measure of inflation and food was up by 4.9%.

Inflation is widespread in many sectors. In our work, we make much of the seismic shock to the economy. The tectonic plates of demand and supply shifted out of balance, causing supply shortages and escalating material costs.

In the US, the economy has also been subject to a Tsunami of dollar waves from cash injections into US households. The boost to domestic incomes has boosted the demand for goods. This "helicopter money" has created the Tsunami of dollar waves following the tectonic shift in supply and demand. Inflation is rising higher than we expect to be the case in the UK. We will find out more on this next week!

The Fed has retired the word "transitory" from the central bank vocabulary. Powell is under pressure to get the policy and messaging right. Officials have had to accept their expectations for inflation have missed the mark.

As we explained in this week's Friday Forward Guidance, the Fed is expected to accelerate "tapering". We now expect the process to be completed by the end of the second quarter. This would leave the way open for two rate rises at least, before the end of 2022.

Markets are accepting the process of monetary tightening is underway. For the moment, there appears to be no prospect of a "taper tantrum". G-7 finance leaders will meet on Monday to discuss rising inflation and the appropriate central bank reaction function.

The focus of policy is moving away from protecting jobs, to protecting standards of living and curbing the rise in prices. It may well be a coordinated move to push rates higher. Travel plans for 2022 may include the escape from Planet ZIRP. Cancellation insurance always advisable ...

That's all for this week. Have a great weekend and a great week ahead. Next week will be the last in the series for 2021. We will be taking a short break over Christmas and New Year ...

John

John Ashcroft : Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ...

© 2021 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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Subject: U.K. Growth is Slowing but will be over 7.5% this year ... 😄