UK Interest Rate Increase and Bank of England’s Monetary Policy Report: The headline here is the decision by the Bank of England’s Monetary Policy Committee (MPC) to increase interest rates by 25 points to 0.5%. This had been predicted and even the news that this was a close decision with a 5-4 vote was not that unexpected; the surprise was that the minority view had been for an even larger increase of 50 points to 0.75% rather than “no change”.
The driver for this change is an upward revision to the forecast for inflation which, with sharp rises in energy prices likely as a result of the increase in the price cap also announced on Thursday, is now expected to peak at +7.25% in April and to average close to +6% for the year as a whole. The MPC also sees broader signs of price pressures across the economy and a “material pick up in pay settlements” which they expect to average +5% this year.
Although the MPC note in their headlines that the UK economy continues to recover, they expect a stagnation in the 1st quarter of 2022 as a result of the restrictions around the Omicron variant and have downgraded the growth forecast for 2022 as a whole to 3¾% (from 5% previously).
The update on business conditions by the Bank’s local Agents notes that while manufacturing output grew at a modest pace it continues to be constrained by shortages of goods and labour. In particular, the automotive and electronics industries are still suffering from a shortage of semi-conductors and in other industries the problems are lengthening delivery times for goods from Asia as a result of shipping delays. While this is expected to ease during 2022, the problems with supply of semi-conductors could persist into 2023.
Investment intentions remain strong with projects that were postponed during the pandemic and the need to increase capacity. However, there were also more reports of investment being delayed due to shortages of goods, machinery and labour.
You can access the Monetary Policy Report on the Bank of England website at https://www.bankofengland.co.uk/monetary-policy-report/2022/february-2022; there is also a link on this page for the pdf file of the report which includes (on page 34 of the document), the Agents’ update on business conditions.
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European Commission Economic Sentiment Indicator and Capacity Utilisation, January 2022: The European Commission (EC) draws from a range of surveys to construct confidence indicators for six sectors of the economy and then uses five of these (financial services is not used) make up its Economic Sentiment Indicator (ESI). The other point to note is that although labelled as “January 2022” or “Q1-2022”, the data collection period was mainly in January so the data really refers to December or Q4 of 2021.
The headline ESI eased in both the EU and the Euro-zone and although it is now at its lowest level since April 2021, it is still at historically high levels and well above the long-run average (which is the base for this indicator). There was a fall in confidence in the services and construction sectors and, to a lesser extent for industry and consumers, while there was a rebound for the retail sector. Confidence in the financial services sector increased strongly.
Among the major EU economies, there was a modest improvement in the ESI for Germany and Spain, but a sharp reduction in Italy, Poland and France with a more modest fall for the Netherlands. However, only Czechia (up on their previous reading), Latvia (down slightly) and Slovakia (up) had an ESI reading that was below the long-run average level for that country.
The small fall in industry confidence was mainly due to an improvement in assessments of stocks of finished products which has an inverse effect on the index as an indication of lower activity – however, in the current situation of low stocks this is actually good news as it points to a more normal situation being restored. There was also a small fall in the current level of total order books and expectations for production over the next 3 months were broadly flat. Both of the factors which are collected but not included in calculating industry confidence – export order book levels and output over the previous 3 months – improved.
This is one of the quarterly reports which generates the capacity utilisation indicators – a noted above, although reported as Q1-2022, they really refer to the position at the end of Q4-2021. Compared to the previous quarter, the utilisation rate for the EU edged up by 0.1 of a point but fell by the same marginal amount for the Euro-zone – in both cases however, it is well above the long-run average (which is the important comparison for this measure).
There was a modest improvement in capacity utilisation in Germany, France and Italy with all of them showing an above average rates of activity; Spain saw a lower level of utilisation although still just above the long-run average. Although no longer part of the survey, as we noted last week in reporting the CBI survey, the UK saw an increase in capacity utilisation and is also well above the long-run average.
You can download the EC report and statistical annex from their web-site at https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/download-business-and-consumer-survey-data/press-releases_en or you can request it from MTA.
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European GDP, 4th Quarter and 2021: The preliminary flash estimate of GDP published by Eurostat shows quarter-on-quarter growth of +0.4% for the EU and +0.3% for the Euro-zone. This represents much slower growth than in the 3rd quarter through a combination of the renewed restrictions in place at the end of last year and because Q3 still included some catch-up activity from earlier in the year as restrictions were eased over the Summer.
If confirmed, this estimate would give GDP growth (seasonally and calendar adjusted) in 2021 of +5.2% for both the EU and the Euro-zone.
Data is only available for a few countries at this stage and among the larger economies that have released their data, Spain had the fastest quarter-on-quarter growth at +2.0%, with Belgium (+0.5%), France (+0.7%) and Italy (+0.6%) also growing. Austria saw its economy contract by -2.2% and Germany was also negative at -0.7%.
For more details, you can download the Euro-indicators report from their website at https://ec.europa.eu/eurostat/news/euro-indicators (31 January).