Surprisingly, GDP actually grew by 0.3% in January, with the services sector contributing 43 percentage points to total output. Funnily enough, within services, real estate was the only subsector that declined, falling by 0.02 percentage points. Entertainment, recreation, football and education helped to keep the economy afloat as school attendance almost reached pre-pandemic levels. Overall, the services sector grew by 0.5%. This is most definitely a one-off, the economy is not out of the woods yet so it’s way too early to start celebrating.
Manufacturing of machinery and equipment was the second biggest subsector to contribute to falling production, declining by 0.12%. Since less capital equipment is being produced, we can expect long-run productivity growth to slow as well, keeping LRAS stagnant. Construction output also fell, and the main contributors to this were infrastructure, which declined by 6.5%, and private new housing, which fell by 3%. Falling housing construction, combined with NIMBYS and land banks, are going to slow down the equilibration process in the housing market, this correction failure may keep prices relatively rigid downwards. Additionally, reduced labour mobility via an increasing scarcity of dwellings will keep more people underemployed, since they won’t be able to afford to live where their skills are most demanded.
Shockingly, it is crude oil that is the only component of the PPI that fell in January, falling by 0.52%. I don’t think this is going to have a tremendous impact on the prices of other goods and services as factor prices still rose by 14.1%. There is an overall downward trend in the prices of imported commodities, falling by 7.9% from its apex of 24.7% in October 2022, but has risen ever so slightly recently to 16.8%. As Russia improves relations with the east, we may see a further rise in import prices since Sunak is trying to break away from China. Economically speaking, this makes no sense as the UK is already suffering a loss of £100 billion worth output of per year from Brexit, according to analysts at Bloomberg Economics. Destroying trade relations even further will provide no merit, especially since the UK is heavily reliant on foreign partners for natural resources and commodities, there is no self-sufficiency in that area.
Rising factory gate prices are going to make production even more costly, so we can expect to see unemployment in these sectors rise later on during the year. Furthermore, as these supply shocks continue to hit intermediate goods, I am anticipating a tighter PPI to feed through to lower-order industries, leading to the CPI remaining relatively sticky downwards later on. A lot of these disturbances are on the cost-push side, so it will be interesting to see whether policymakers focus on the “IS” curve. Real estate, manufacturing, production and other industries of higher order are very sensitive to interest rates, so it does make sense that activity in these sectors are declining, whilst consumer-facing industries are doing well.
Russia, the most sanctioned country on the planet right now, is actually expected to grow, whilst the UK is the only G7 country the IMF expects to contract in 2023😭. Seems to me that Sunak is a bit too optimistic right now without actually looking at the bigger picture. If and when unemployment rises over the next two quarters, maybe we will see a change in attitudes. Moreover, this could induce a general setback for the West in totality as tensions flare between the US and China. It would only be to the West’s detriment, as Russia and China, two global economic powerhouses, have extensive influence over the rest of the global economy, any sanctions will surely boomerang in more ways than one.
It is estimated that the UK added 102,000 in the first month of the new year, whilst the CPI has fallen to 10.1%. The labour market is proving to be astonishingly resilient, despite the current economic turmoil. The increase was driven mainly by part-time employees, as people are taking on more jobs to make ends meet. Once again, this is mainly in consumer-facing industries, masking what the entire economy is actually going through. This will probably excite the BoE to raise rates further and destroy demand as the labour market is proving to be buoyant at the minute. This will hit ower occupiers’ housing costs the hardest, so we can expect to see a steady increase in the OOH over the next one to two quarters.
Conclusion
Overall, the data is most definitely exaggerating our current predicament and this will lead to unsound policy as the year goes by. Sunak is way too sanguine in saying “confidence is returning”, deceiving the public about the actual health of the economy.
The labour market is pretty hot right now, but it could well mean that the same number of people are taking on more jobs, and with our current situation, I’d say that this is more likely to be the case. With inflation way above target, this is just going to translate into higher rates. The statistics provided by the ONS show that the unemployment figures aren't equiproportionate across all sectors. Employee growth among manufacturing, construction and wholesale are below the entire sector array. And as mentioned earlier, these higher-order industries, the actual bulk of the economy, are delicate to changes in the interest rate, so more QT, demand destruction, and higher unemployment, I’m predicting, will tip the economy into a recession by the end of the third or fourth quarter.
