Economic update: the economy is suffering, but there are signs of light

Richard Ramsey, Chief Economist NI at Ulster Bank, looks at the latest numbers and research on the health of the economy.

Bank of England (BoE) governor Andrew Bailey has been in the US for the 2022 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group. His mind, however, will not wonder far beyond the problems in the UK economy. The BoE is caught between having to raise rates to tame inflation and concerns that much higher mortgage rates may push the UK into a sharp downturn.

The BoE’s Chief Economist, Huw Pill, was at pains to stress the temporary and targeted nature of its up-to-£65bn operation to restore financial stability – and save pension funds. This entailed buying government bonds to bring down rising yields. On 17 October, new Chancellor Jeremy Hunt cancelled almost all the tax cuts announced in the mini budget and said the support given to people for their energy bills will be scaled back. All eyes will be on what happens to gilts and sterling, and the next meeting of the BoE’s Monetary Policy Committee on 3 November.

Data from September's Ulster Bank Northern Ireland PMI® report saw the third quarter of 2022 end with the Northern Ireland private sector in contraction. Rates of decline in output and new orders quickened and although employment increased, job creation was marginal.

Local businesses witnessed the pace of decline in output and new orders accelerate as survey respondents cited deteriorating economic conditions, falling consumer confidence and rising prices as explanatory factors behind the continuing decline.

Input costs continued to rise at a substantial rate and are at levels not seen prior to May 2021. Services firms reported the sharpest increases in their cost base, with wages and energy costs now increasingly at the forefront of inflationary pressures. Wholesale gas prices fell 17% in the week to 2 October and are now 60% below the peak reached on 31 August, so there is a chink of light before the winter ahead.

The main findings of the September PMI survey:

  • The seasonally adjusted Business Activity Index dropped to 42.3 in September from 45.4 in August, signalling a sharp and accelerated reduction in output over the month. Falling new orders, sharp cost increases and deteriorating economic conditions all contributed to the latest decline.
  • Despite new orders and activity declining, employment continued to increase in September, but the latest rise was only marginal and the softest in the current 19-month sequence of growth. Pessimism around the year-ahead outlook was the joint strongest in almost two years amid worries about inflationary pressures and economic conditions.
  • Businesses have recorded their 19th consecutive monthly rise in staffing levels. However, the pace of employment growth was the weakest in that sequence and manufacturing saw the first decline in staff numbers since February 2021. The slowdown in hiring is currently linked to difficulties finding suitable staff rather than just reflective of falling demand.

Don't write the economy off just yet

The UK labour market does continue to soften, albeit slightly, with online jobs down 17% on the year while small business jobs have fallen year-on-year for five months. Yet research also suggests folk are still marking end-of the-month payday with a meal out. The economy’s down, but defiantly not out.

For further insight, listen to the latest Ulster Economix monthly podcast.

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