Prices: a confidence index

Economists are a little jinxed right now. Whatever they say is likely to happen, the opposite has a funny way of showing up.

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Julian Chillingworth, Chief Investment Officer
17 August 2022

The UK economy has been growing steadily following the Brexit vote and the US has been running well despite Donald Trump taking the White House. European data have been improving too. The worries of scores of macroeconomists have been unfounded so far this year.

We didn’t expect a severe recession following June’s referendum, although we still thought growth would slow following a vote to leave. Instead, GDP has expanded faster as British consumption ramped up. Manufacturing has picked up as well, helped no doubt by a much cheaper pound that makes British-made goods more attractive to export. Manufacturing PMIs (confidence and output surveys) hit a three-year high in early May.

There is a flipside, however. The UK imports much more than it exports, which means that higher prices for everything from power to supermarket salami will have a wider and greater impact than the tailwind for some manufacturers. Digging deeper into measures of inflation for producers show there are still a lot of costs that haven’t yet been passed on to retailers and the consumer. Consumers are still feeling relatively confident, but much less so than before inflation jumped rapidly in the last six months. Also, wages have struggled to keep pace with inflation recently. If that continues, it will erode purchasing power and weigh on the country’s mood even more.

Inflation has a large influence on people’s psyche. Typically, UK households get more pessimistic about the future when they expect higher inflation. That makes sense – they can’t buy as much stuff when it gets more expensive. After a period of bargain-basement levels of inflation and interest rates, Britons have responded by boosting credit card spending (currently growing around 10% a year) while the savings rate has slumped from 7% to 3.3% in two years. Contrast that with Japan, where decades of deflation has made Japanese highly dubious of spending, let alone buying company shares. They are a nation raised on the idea that goods become cheaper the longer you wait and that it is better to lend than borrow.

We think that consumer confidence will be pivotal for the UK’s continued recovery from the global financial crisis. To that end, we are watching wage growth and inflation carefully.

Index

1 month

3 months

6 months

1 year

FTSE All-Share

-0.4%

4.0%

7.1%

20.1%

FTSE 100

-1.3%

2.9%

5.6%

20.0%

FTSE 250

3.8%

9.0%

13.2%

20.0%

FTSE SmallCap

2.1%

6.9%

12.6%

24.0%

S&P 500

-2.4%

2.1%

6.6%

32.7%

Euro Stoxx

0.8%

8.6%

9.9%

31.1%

Topix

-2.2%

-0.2%

-1.1%

26.9%

Shanghai SE

-5.5%

-3.1%

-5.7%

14.3%

FTSE Emerging

1.5%

8.9%

11.3%

35.6%

Source: FE Analytics, data sterling total return to 30 April

How soon is now?

For all we tease the French about their short working weeks and long retirements, they are much more productive than UK workers. That’s not to say Britons are lazy or incompetent – far from it. UK employees work hard and long, but unfortunately output growth refuses to budge.

On average, workers in the UK take five days to produce what their counterparts in France, Germany and the US do in just four. It seems our friends across the Channel do just fine with their short weeks …

The UK needs investment in infrastructure, education and technology to boost its productivity. Technology is a particularly strong driver of improvements in efficiency. It’s the difference between emails and carbon-copied memos; between an abacus and a computer; between a mechanised production line and one run solely by people.

Our research team’s report How soon is now?  takes a deep dive into disruptive technology that is coming on stream in the next decade and what effects these changes could have on the economy and your investments.

Unfortunately, people are reluctant to embrace new inventions. The familiar has a firm hold until we are completely convinced of an alternative’s worth and safety. We had supersonic air travel in the 1970s, but the Concorde crash in Paris in 2000 snuffed out all appetite for it.

Self-driving cars are being developed in leaps and bounds, but fears about the ramifications of introducing them are never far from the headlines. Similarly, automation of manufacturing is dogged by fears of hollowing out well-paid industrial jobs on the factory line. In many cases, these jobs are dangerous, menial and back-breaking. It makes sense to use machines that are more productive where the work does harm to humans.

Of course, people whose jobs are automated away need help to retrain. And this, while true, cannot help but sound glib. A person’s job is woven deep into their identity, especially when the work is hard and dangerous. Think miners, steelworkers, foresters and soldiers.

Successive governments must continue to encourage technological innovation. But they must also ensure that the dislocated get all the aid they need to continue contributing to society and feel a part of it. Otherwise, the disenfranchisement that is sweeping the globe will only intensify. Technological change is disruptive, but also necessary. Because technology is the future and we cannot turn our back on it.

And we shouldn’t turn our back on people either.

Bond Yields

Sovereign 10-year

Apr 30

Mar 31

UK

1.09%

1.14%

US

2.28%

2.39%

Germany

0.32%

0.33%

Italy

2.28%

2.31%

Japan

0.01%

0.07%

 

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