UK labour market tightened further

Chris Scicluna
Emily Nicol

Chinese activity data comfortably beat expectations, but new pandemic wave clouds outlook
While the rout in China’s stock markets continued, the latest Chinese economic activity numbers published overnight suggested surprisingly firm growth at the start of 2022, with industrial production, investment and retail sales coming in well ahead of expectations. And in light of those figures, the People’s Bank felt no need to deliver the rate cut that many observers had speculated would be announced today. In particular, in the first two months of the year, industrial output rose 7.5%YTD/Y, 3.2ppts higher than the annual growth rate in December. Manufacturing production accelerated by 3.5ppts to 7.3%YTD/Y, with a strong rebound in autos production as well as solid growth in high-tech equipment production, as supply-side challenges temporarily faded. Admittedly, power generation slowed by 0.4ppt to 6.8%%YTD/Y. Among non-manufacturing sectors, services growth rose by more than 4.2%YTD/Y, 1.2ppt higher than the annual rate in December, with solid growth in ICT as well as hospitality. Meanwhile, fixed asset urban investment also accelerated at the start of the year, by 7.3ppts to 12.2%YTD/Y, as a surge in state-owned investment reflected the front-loading of fiscal stimulus. There were also big increases in manufacturing and tertiary investment so far this year.

The improvement in output tallied with a pickup in household expenditure at the start of the year, with nominal retail sales in the first two months of 2022 up 6.7%YTD/Y, 5.0ppts higher than the annual rate at the end of 2021. Like production, there was a notable improvement in auto sales, which rose 3.9%YTD/Y, the first positive growth rate since June, with clothing sales also posting the first increase since July and growth in spending on petrol jumped 9ppts to 25.6%YTD/Y. So, despite a drop in furniture sales, spending on consumer goods rose 6.5%YTD/Y, while spending on catering services jumped 11.1ppts to 8.9%YTD/Y. Sales were to some extent flattered by price increases. Nevertheless, adjusting for these effects, real sales were still up a healthy 4.9%YTD/Y from 1.7%YTD/Y in December. Looking ahead, however, the outlook for both spending and production remains clouded by the latest pandemic wave, with the spike in new cases having led to multiple city-wide lockdowns, including the all-important city of Shenzhen and the whole of the north-eastern province of Jilin.

UK labour market tightens further but pay struggles to keep up with inflation
By and large, this morning’s UK labour market report – the last top-tier data to be published ahead of the BoE’s monetary policy announcement on Thursday – extended recent trends, suggesting increasing tightness consistent with the case for another rate hike even as pay struggles to keep up with rising prices. Indeed, as economic growth was well maintained (at 1.1%3M/3M at the start of the year) despite the spread of Omicron, the unemployment rate fell 0.2ppt in the three months to January to 3.9%, the lowest in two years (i.e. just ahead of the pandemic). Thanks to an increase in the number of full-time employees, the employment rate edged up to 0.1ppt to 75.6%, the highest since June 2020, albeit still 1.0ppt before the arrival of Covid-19. However, overall, the number of people in employment fell 12k in the three months to January while inactivity continued to rise, with the respective rate now 1.1ppt above that before the pandemic due not least to increased long-term sickness. While the pace of increase slowed again, the number of job vacancies rose to a new record high, up 105k to 1.318mn, with record levels in half the sectors. So, the ratio of unemployed workers to vacancies – a key measure of labour market tightness – hit a new record low.

Meanwhile, average total pay (including bonuses) accelerated 0.5ppt to 4.8%3M/Y in January largely thanks to higher bonuses. However, it was only up a minimal 0.1%3M/Y in real terms. And in contrast, while growth in regular pay (i.e. excluding bonuses) edged up 0.1ppt to 3.8%3M/Y – back close to the top end of the range between the global financial crisis and the pandemic – it was down a marked 1.0%3M/Y in real terms. Some MPC members were recently alarmed by the BoE agents’ survey finding that firms expect pay to rise 4.8%Y/Y this year, finding such evidence of potential second-round effects from high inflation cause to tighten monetary policy further. But with inflation having accelerated markedly further at the start of the year, and to rise further over the near term – probably well above 8.0%Y/Y in April and to spike again in above 8.0%Y/Y in the autumn – real pay will fall sharply this year, with household real disposable incomes set to fall the most in more than four decades.

German ZEW to flag rising concerns about near-term outlook; euro area IP to be broadly flat in January; French inflation revised up
With respect to the euro area data-flow, arguably of most interest today will the ZEW investor survey for March, which seems bound to tally with last week’s Sentix survey to suggest a marked deterioration in perceptions of the euro area economic outlook. Meanwhile, despite firm growth in Germany and France at the start of the year, in light of declines in Italy, Ireland and the Netherlands, euro area industrial production in January is likely to have seen little if any growth and hence remain close to the pre-pandemic level.

Ahead of Thursday’s final euro area inflation release, today’s equivalent French figures raised some expectations that the aggregate euro area figure could be revised higher still from the record-5.8%Y/Y reading in the flash estimate. The French HICP inflation rate for February was nudged up by 0.1ppt to 4.2%Y/Y, a jump of 0.9ppt from January and a series high. On the national measure, headline inflation was unchanged from the preliminary release, rising 0.7ppt to 3.6%Y/Y. This in part reflected higher energy inflation (up 0.7ppt to 5.6%Y/Y), but also a rebound in manufactured goods inflation (up 1.6ppts to 0.6%Y/Y) due to the timing of winter discounting. And with services inflation also ticking slightly higher (up 0.2ppt to 0.5%Y/Y), core inflation (on the national measure) jumped 0.9ppt to 2.5%Y/Y, the highest since May 1993.

Beyond the economic data, ECB President Lagarde is scheduled to give a speech this afternoon in Berlin, which will be watched for any further insight to last week’s hawkish Governing Council decision.

US PPI numbers to come as the Fed’s two-day policy meeting kicks off
As the latest FOMC meeting gets underway today we will also see the release of February PPI numbers. Reflecting higher energy prices, as well as other supply-related price pressures, Daiwa America’s Mike Moran expects producer prices to rise a further 0.8%M/M, bang in line with the average increase over the past twelve months, to leave annual inflation last month close to 10%Y/Y.

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