London’s Economy Today editorial – July 2022
Rising inflation continues to drive global economic conditions
The cost-of-living crisis continues to sharpen, with Office for National Statistics (ONS) data showing that consumer price index (CPI) inflation increased by 9.4% year-on-year in June, up from 9.1% a month earlier. The largest contributions to the annual rate came from household energy, vehicle fuel and food as the repercussions of high global commodity prices continue to ripple across the UK economy.
These effects may continue to worsen in the coming months, with market signals pointing to fears of higher gas prices in the autumn should Russia reduce its supplies to Europe, creating shortages. Wholesale market futures currently point to a surge in natural gas prices to nearly 40% above current levels by December. Futures prices are part of Ofgem’s standard tariff price cap calculations, so even if traders’ fears prove mis-founded, those predictions will already form part of the October cap calculation. While an agreement brokered between Russia and Ukraine on grain supplies should help ease the strain on agricultural commodities, this is likelier to prevent a sharper increase in food prices than actively push them down.
Using data on individual price quotes collected around the country by the ONS, Professor Richard Davies of Bristol University has examined the evidence on which goods have the highest share of price quotes rising month-on-month. Many of the key items in the list are now foodstuffs, which is unusual in the historical data – foodstuffs often see many prices go down as well as up. This suggests both that the current crisis poses a particular challenge for household staples and that these price hikes may be unusually permanent.
With lower-income households devoting a higher share of their outlays to food and energy, it was already clear that this crisis is set to worsen existing inequalities. The latest polling by YouGov, commissioned by the GLA, shows that Londoners who are already financially struggling are the likeliest to cut back on essentials or go into debt to manage the rising cost of living (Figure 1). The survey found that 17% of Londoners are going without essentials, relying on debt, or struggling to make ends meet, which we class together as ‘financially struggling’. That figure is up from 12% in January. To manage the rising cost of living, nearly three quarters (73%) of financially struggling Londoners are buying less in food and essentials – roughly double the share of Londoners overall (37%). Meanwhile, nearly four in ten of these same Londoners are going without essentials (38%) and similarly nearly four in ten are using more credit or going into debt (37%). Among all Londoners, those shares are 11% and 14%, showing the difference between the average experience of the cost of living crisis and the acute challenge for those already in a financially precarious situation.
Figure 1: Top ten responses for how financially struggling Londoners are dealing with a higher cost of living
Source: YouGov, commissioned by GLA, June survey (all sample n= 1015, financially struggling n= 166); All figures, unless otherwise stated, are from YouGov PLC. Total sample size was 1015 adults. Fieldwork was undertaken between 17th – 22nd June 2022. The survey was carried out online. The figures have been weighted and are representative of all London adults (aged 18+).
The rising cost of living will have consequences for the real economy too. The drag on consumers’ real spending power is likely to cut household spending this year, and UK retail sales may already be showing the strain. Overall UK retail sales volumes fell 0.1% in June, following drops of 0.8% in May and a flat reading in April. Adjusting for inflation, retail sales have now fallen or held steady every month since last November. While this is likely to prove bad news for customer-facing sectors in London’s economy, it is worth noting that consumers in the capital appear to be less pessimistic than across the UK overall according to the latest consumer confidence figures.
UK economy grows unexpectedly in May
Data from the ONS published this month showed that the UK economy grew unexpectedly in May. GDP increased by 0.5% between April and May, this follows on from a monthly decline of 0.2% in April (Figure 2). All sectors of the economy also saw growth in May and monthly GDP is estimated to be 1.7% above its pre-pandemic levels in February 2020.
However, looking forward concerns remain about the outlook for the UK economy. The Bank of England (BoE) in its latest Financial Stability Report published in July noted that “the outlook for the UK and global economies has deteriorated materially”. While, “the outlook is subject to considerable uncertainty and there are a number of downside risks that could adversely affect UK financial stability”. Still, the report observes that “major UK banks have considerable capacity to support lending to households and businesses even with the deterioration in the economic outlook”. Although, for households “the rise in living costs and interest rates will put increased pressure on UK finances in coming months”.
Business leaders have also been warning of the economic risks the economy faces. For example, Brian McBride, the president of the CBI, has warned that the trough of the economic downturn is “probably going to be higher, and it’s going to take longer to get out of this thing”. With the cost of living crisis meaning that “individuals and… businesses… are in for a tough time”.
OBR warns that UK public finances on “unsustainable path”
Looking longer term the Office for Budget Responsibility (OBR) has published projections of the future path for UK public sector debt. In this they observe that a “riskier world and [an] ageing population ultimately leave the public finances on [an] unsustainable path”. Their baseline forecast sees debt rising to 267% of GDP in 50 years’ time with it hitting nearly 320% if “inevitable periodic shocks” are taken into account. Geopolitical shocks and energy price rises were also modelled, which tested continued rising geopolitical tensions and the impact of persistently high or a temporary spike in energy prices (Figure 3).
Surging inflation has also pushed up UK government debt interest payments to £19.4bn in June, the highest ever recorded level with ONS records beginning in 1997. This was more than double the interest payments recorded in June 2021, which was the previous record. Around a quarter of all UK government debt is linked to the rate of inflation.
UK current account worsens
Beyond public finances new data from the ONS has shown a sharp deterioration in the UK’s current account deficit (where the value of the goods and services it imports exceeds the value of the goods and services it exports) with it falling to 8.3% of GDP in Q1 2022. This compared to an average deficit of 2.6% for 2021 as a whole and was the worst current account deficit ever recorded with records beginning in 1955. The underlying current account which excludes precious metals stood at a deficit of 7.1% of GDP in Q1 2022. However, it should be noted that the ONS advise caution when comparing with other periods due to data collection changes.
While we do not yet have timely data for London’s contribution to UK trade, the ONS has just released regional trade figures for 2020. These figures show that London is the region with the second-highest exports and imports of goods in the UK, and by far the largest exports and imports of services. London’s large surplus in services trade alongside the improvement nationally in the trade surplus in services may be some comfort when set against the fact that the recent deterioration in the trade accounts has been driven by goods. The capital is therefore likelier to gains from the parts of the UK trade balances that are improving, and less likely to lose out sharply from other parts of UK trade where imbalances are worsening.
Global economy still facing challenges
Inflationary pressures continue to be felt across the world with central banks warning about further action being needed to contain them. Thus, minutes from the June meeting of the US Federal Reserve Open Market Commission observed that many members “judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted”. This has led to a view that inflation will persist longer than previously expected and triggered US rates to rise by 0.75 percentage points (pp) in June and by a further 0.75pp in July to a target of between 2.25% and 2.5%.
Inflation is also impacting the Eurozone and has led to the European Central Bank (ECB) raising interest rates for the first time in 11 years. The Eurozone rate rose by 0.5pp and takes the rate from -0.5% to 0%. Further increases are likely with the ECB noting that they would “be appropriate” but that they would take a “meeting-to-meeting” approach in deciding whether to increase them. Elsewhere the European Commission has lifted its inflation forecast for the Eurozone whilst cutting its GDP forecast for 2023 in response to the ongoing energy problems deriving from the war in Ukraine. In its summer 2022 forecast the Commission now expects the Zone’s economy to slow to 1.4% growth in 2023 after growing by an expected 2.6% in 2022. While inflation is expected to peak at 7.6% in the Eurozone this year. These changes were driven in part by fallout from the war in Ukraine.
At a broader global level, the IMF has cut its forecasts for the world economy once more in its July projection rounds. The baseline forecast now anticipates global growth of 3.2% in 2022 and 2.9% in 2023, down from its April projections of 3.6% growth in both years. China’s continued struggles with COVID lockdowns and ailing property market, alongside tighter monetary policy and lower consumer spending power in the US dominate the downward revisions in 2022. The largest contribution to downward revisions for next year is from the Eurozone, as concerns surrounding energy supplies due to the war in Ukraine combine with a tighter policy path from the ECB. The IMF also drew up an adverse alternative scenario where some combination of major risks crystallise. The list included Russia cutting off gas supplies to Europe, de-anchoring inflation expectations, tight financial conditions prompting an emerging market debt crisis, fresh COVID outbreaks in China and global food insecurity due to high agricultural prices.
Drilling down into the impact of a Russian gas embargo, the IMF also recently conducted a scenario analysis on the European economy under different gas supply assumptions. In this analysis, the IMF predicted that the European economy could cope with a 70% reduction in Russian gas supplies, but that gas shortages would occur with a full embargo. Under a full embargo and without joint action to offset the impacts, economic contractions of more than 5% could be seen over the coming year in the Czech Republic, Hungary, Slovakia and Italy.
London’s population increases over the 2010s
The first results from the 2021 Census were published at the end of June. These showed that between 2011 and 2021 the capital’s population increased by 3.2% from 7.94 million to 8.20 million. A larger increase than any other region. It should be noted it is possible that the Census’ population estimates will have been impacted by the effect of the pandemic and further analysis may show this.
Looking at the ongoing impact of the pandemic on the labour market the ONS has recently published analysis of the trends in homeworking between 2019 and 2022. This found that in January to March 2022 London had the highest percentage of homeworkers (37.0% and an increase from the 14.2% seen between October to December 2019), followed closely by the South East (36.9%, an increase up from 19.5% before the pandemic). There was a slight variance by sex between homeworkers in London with females more likely to homework (37.8%) than males (36.4%). This reversed the situation seen prior to the pandemic when males (15.2%) were more likely to homework than females (12.9%). The ONS also undertook analysis looking at the change in the number of people physically working in a region either at home or at a work address in the region. This found that London had the biggest decline in people working within the region with a drop of 4.8% compared to pre-pandemic levels. The capital also saw the biggest drop of people commuting into the region with a decline of 36.8%, followed by a decline for the South East of 29.1%.
GLA Economics will continue to monitor these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.