London’s Economy Today – November 2021 editorial
Inflation picks up sharply in October, with higher rates still to come
October saw annual CPI inflation accelerate sharply to 4.2% from 3.1% in September. This annual reading is a ten-year high, while the monthly price increase of 1.1 percentage points is perhaps even more striking as the fastest in nearly 30 years.
While inflation was broad-based, the largest contributions came from housing and transport. Ofgem increased its standard tariff rate by 12% last month following seven-year highs in natural gas prices. As a result, housing and housing services prices were up 6.8% annually, up from 1.9% in September, with electricity, gas and other fuels serving as the main driver. Annual inflation for electricity reached 18.8%, with 28.1% for gas. As global oil prices also pushed close to seven-year highs and retailers recovered from shortages in September, domestic petrol prices hit their highest rate since 2012. This prompted a sharp rise in transport prices of 9.9% year-on-year. Most of the increase in transport inflation came from higher fuel costs, though other supply chain challenges played a role. Semiconductor shortages have continued to depress the availability of new cars, sharply raising demand and prices for second-hand vehicles – CPI for used cars has risen over 27% since April 2021.
October’s price acceleration was sharp, but the Bank of England’s November Monetary Policy Report did anticipate a significant increase in inflation in Q4 and had been expected to raise rates although that did not happen this month. The Bank now thinks inflation will peak above 5% in spring 2022 as Ofgem increases its tariff cap again in April, while global commodity prices and supply chain challenges ease only slowly. If shipping, oil and gas prices do not begin to come off their peaks in the coming months, there will be further upside risks to this already-high forecast. This, in turn, could lead to greater pressure for the Bank to raise rates faster, potentially dampening the recovery.
UK GDP slows in Q3, but London may have seen more consistent growth
The UK grew at a slower-than-expected 1.3% in Q3, with downward revisions to monthly GDP in July (now a 0.2% contraction) and August (now only 0.2%). September was stronger than expected at 0.6% monthly growth, but around two thirds of the strong growth in service sectors came from Health as GP appointments rose sharply. Adding to the subdued tone around GDP, the Bank of England also revised down its long-term growth forecasts, leaving the UK economy 2% permanently smaller than pre-pandemic projections – down from around 1% before this latest reassessment. In the nearer term, the Bank expects 7% growth this year and 5% next year, down from 7.3% and 6% in its previous Monetary Policy Report.
Sectors in which London specialises were mixed in September, as some like IT (-2.3%) and Financial services (-0.2%) did poorly, while others like Professional services (2.1%) did well. IT activity is now at its lowest level since December 2020, while finance has been steadier. Professional services may have been upwardly distorted due to a dash for legal services as homebuyers closed out purchases before the stamp duty holiday ended.
Reweighting the national GDP index to match London’s industry mix suggests that growth for the capital may have been faster than the national data in July and August, but largely in line with UK growth in September. Across the pandemic, London’s industrial mix has generally pointed to an outperformance of UK averages during quarters of contraction, but a softer recovery during periods of growth at the UK level. Across the whole period London has outperformed the UK. Google mobility data for London is also consistent with stronger growth than the national average in July and August, but a similar pace in September (Figure 2).
London’s retail sector may be doing better than average, but the CAZ is still struggling
In amongst the details of the September GDP data, customer-facing services did poorly at the UK level, which was mostly due to retail trade. Other high-contact services did much better, with Accommodation and food services growing 2.3%, while Arts and entertainment growth was also strong (1.2%). Growth in Accommodation and food services was strong enough that at the national level, output in the sector is now around 4% above pre-pandemic levels.
There may be some more promising signs for London’s retail sector compared to the wider UK. Firstly, most of the 1.5% drop in output in the retail sector across September was due to a sizeable 13.3% fall in vehicle sales activity as supply chain challenges limited availability. Yet Londoners usually spend on average 20% less on buying vehicles than the average UK consumer, so the capital’s retail sector may not be as heavily affected by bottlenecks on car sales. Secondly, as shown in the indicators section, London’s consumer confidence pushed slightly positive in November (+1), much stronger than the clearly negative national reading (-14), which should translate into a greater spending appetite in the capital. Indeed, the latest Mastercard data show total card spending on retail approaching its pre-pandemic level in late October.
However, within London the distribution of the retail recovery remains uneven. Mastercard data still show a clear hollowing out of spending from the centre of the city. The four central boroughs of the City of London, Camden, Westminster and Kensington and Chelsea are still seeing card spending levels below the pre-pandemic norm, and the recovery is only just complete in some of the adjoining boroughs in the Central Activities Zone (CAZ) (Figure 3). It is also worth noting that in some boroughs, the average strength of retail card spending is significantly above pre-pandemic levels. This may be at least partially explained by a combination of inflation and a shift towards card spending away from cash (a trend that pre-dates the pandemic). It is also worth noting that within most boroughs some High Streets have recovered better than others.
London labour market continues to improve despite the end of the furlough scheme
Looking at the labour market recovery from the pandemic the latest ONS data for London indicates that jobs continue to rise, and unemployment is still falling, although London is performing worse than the rest of the UK. London residents who were payrolled employees rose by around 30,600 or 0.7% between September and October, although this remains 0.6% below pre-pandemic (February 2020) levels. It compares with a 0.8% increase in payrolled employees across the UK, and numbers for all other countries and regions are above February 2020 levels. The London unemployment rate was estimated at 5.6% for the three months ending in September, down 0.8 percentage points on the quarter but above the UK average of 4.3%.
This is consistent with the view that there has been a soft ending to the Coronavirus Job Retention Scheme, or furlough scheme. Surveys by the ONS and the Resolution Foundation of furlough leavers support this conclusion. When the scheme finished in September there were 231,000 Londoners still on it. This month’s LET supplement reports on the history of the scheme.
London house prices fall in inner London
The ONS’s latest population estimates for London find that London’s population rose in 2020 to slightly over 9m. This is despite the likelihood that some EU migrants have returned to their home country during the pandemic, and media stories of families settling outside the capital. The latest ONS data on house sales and prices indicates that there was a fall in sales in the year to Q1 2021 suggesting that any increase in out-migration was not by homeowners. The level of London sales was similar to that after the 2008 financial crisis, and the fall continues the trend since 2016 – sales were half the level they were in 2008 and earlier. Mean sale prices (after inflation) in the capital were unchanged for the second year running (Figure 4). Within London house sales fell across the city, while there were falls in median (and mean) house prices (after inflation) in several local authorities in inner London and rises in most local authorities elsewhere in London.
Europe sees COVID-19 cases rise sharply, and London could be at risk of further disruption
The pandemic however continues with Europe seeing a sharp rise in new cases of COVID-19, with new daily cases more than doubling over the last month to above 400 per 100,000 across the EU in the week ending 19 November. This is largely in line with the UK’s current pace of new cases, which however has been trending down since mid-October. This is also the highest pace of new cases for the rest of Europe since April, when many countries were forced to tighten lockdown measures. This new wave of virus cases could prompt a response in the same direction, with several countries already implementing partial lockdowns, including the Netherlands, while Austria has moved to a full lockdown. Others such as Ireland, Slovakia and the Czech Republic are introducing intermediate restrictions like partial curfews and a return to working from home.
Vaccination efforts are going to be a central factor in how damaging this new wave of cases will be. While different countries’ case rates are only weakly (negatively) correlated with their vaccination rates, over two thirds of the variation in death rates across different countries in Europe can be explained by the share of their adult population that has received a second vaccine dose. Around half of the EU/EEA countries have a full vaccination rate of over 80%, with some even above 90%, but some in central and eastern Europe have rates below 70%. If the latest wave of cases and lockdowns escalates, this could offer a further shock to London’s economy, initially from reduced export demand, but with the growing threat of more virus cases spreading to the UK and prompting further activity restrictions. While in recent months case numbers have been better controlled in London than in the UK overall, the damage from any fresh surge in cases could put Londoners at greater risk, as at just over 60% the city’s full vaccination rate is much lower than the UK average of around 80%.
COP26 heralds the rise of Green Finance
Beyond the pandemic COP26 took steps to reduce global net carbon emissions to zero by 2050, and reduce them by half this decade. It clarified that the ambition was to maintain global warming to 1.5°C, and to produce further national commitments next year. In the run up to COP26 the government published its ‘Greening Finance Roadmap’ to support its ambition to develop the City of London into the leading global centre for green finance. London is already top in the Long Finance global ranking of green finance centres. The Roadmap sets out three stages involved in aligning the UK’s financial system with its commitment to net zero emissions by 2050:
- Making information relating to
sustainability available for financial decisions makers. All companies,
including financial services firms, would be required to set out detailed
public plans on how to move to a low carbon future by 2023;
- Ensuring this information
becomes embedded in financial and business decision making;
- Changing financial flows within
the UK so that they align with net zero commitments.
In other developments the Bank of England will no longer buy bonds from companies that make money from the mining of thermal coal, and will only purchase from carbon-intensive organisations that had a target for cutting greenhouse gas emissions. The London Stock Exchange, for its part, plans to launch listed carbon funds that would allow investors to buy carbon offsets, the units used by organisations to compensate for their emissions. This would address the difficulty faced by offset project developers of accessing capital at scale, and by buyers of accessing a long-term source of supply of the units. There are concerns that some companies buy the units in place of reducing their emissions, and that some projects funded in this way would have happened anyway – that is, they also do not contribute to a reduction in carbon emissions.
This will complement the work of the Glasgow Financial Alliance for Net Zero. More than 450 leading financial institutions, including banks, insurers, pension funds, export credit agencies and asset managers, from 45 countries, have committed to managing their assets of more than $130tn in the line with 1.5°C. This compares with the total cost of the global transition which has been estimated to be around $4tn every year for the next three decades.
Brexit rows continue to simmer
Further to last month’s dispute over access to fishing waters, tensions between the UK and the EU have been rising again over the implementation of post-Brexit trading arrangements for Northern Ireland. Last month, the EU announced some simplifications to the implementation of the Northern Ireland protocol which addressed many of the concerns of the business community. This has not addressed sufficiently the demands of the UK government, and specifically that dispute resolution is overseen by the European Court of Justice. The UK government has threatened to trigger Article 16, because it believes the arrangement has caused “serious economic, societal or environmental difficulties” or the “diversion of trade”. The EU would respond if this happened, and, ultimately, the entire EU-UK Trade and Cooperation Agreement (TCA) could be terminated. There would be adverse implications for all of the UK, although as the TCA does not cover services London might be comparatively less affected.
Flights re-start to the USA
On 8 November British Airways and Virgin Atlantic flights simultaneously left Heathrow Airport for the USA more than 600 days after the introduction of the US travel ban. Its lifting should be a significant fillip for the travel market. In 2019, there were 4.8m overnight visits to England from the US, of which 3.6m (or three-quarters) were to London according to the ONS. A sixth of the 21.7m overnight visits to London that year were from North America. Heathrow Airport reports that passenger numbers fell by 97% at the start of the pandemic, and in October remained 57% below their pre-pandemic level.
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