Economic Overview – Year End 2021

By on Friday, January 14th, 2022 in Lettings, Market Trends, Research, Sales.

Inflation hits 5.1%

Overall, the London economy has survived remarkably well given where it was a year ago. As demonstrated at the end of 2021 with the Omicron variant, Covid remains a serious threat to stability, as do Labour shortages and supply chain challenges. The consequences of Brexit have to some extent been masked by the overwhelming impact of the pandemic but remain to be addressed.  

 In November inflation hit 5.1%, the highest it has been since September 2011. A wide range of price rises contributed to the steep rise including fuel, fashion, food and second hand cars. While there had been much talk of higher than anticipated inflation this takes the rate significant higher from the mid-year forecasts of an inflation rate in 2021 of 2.3%. The Bank of England was expecting inflation to peak at 5% by April 2022 but clearly given its current level it could rise further before subsiding.    

 The Bank of England has a difficult path to tread in trying to distinguish inflationary forces that are transitionary from those that represent a more persistent inflationary pressure. The Monetary Policy Committee has acknowledged that some modest tightening of monetary policy over the forecast period will be necessary to meet its 2% inflation target sustainably over the medium term and the case for an interest rate rise had certainly been building. The Bank of England decided to raise rates from 0.1% to 0.25% in December, surprising many given the resurgence of Covid with the Omicron variant, and its likely impact on consumer spending in that important pre-Christmas period, particularly in the hospitality sector. The current consensus forecast is that by the end of 2022, interest rates will be 0.5%.

The UK economy grew by a further 1.1% in the third quarter meaning that GDP is only 1.5% shy of returning to pre-pandemic levels. At the end of Q3 GDP growth was at 5.2% for 2021 and if the economy achieves a similarly moderate quarterly growth rate in Q4, this will take the annual growth rate close to 7% at year end. As such, the UK’s economic growth rate hasn’t varied (upside or downside) from the consensus forecasts made mid-year. 

Looking across the consensus economic forecasts compiled by HM Treasury the main changes from mid-year are around the higher than anticipated inflation rate (H1 2021 forecasts was 2.3% for the year end) and lower than anticipated unemployment rate (H1 forecast was 6% for the year end).

Economic Overview – Year End 2021

Unemployment for the UK fell to 4.2% in the 3 months to the end of October 2021. The furlough scheme ended in September 2021 with around 1 million employees still furloughed. It will be a little while before the impact can be seen in official employment data, especially with some employees working out notice periods however early indications are that the unemployment rate is likely to nudge up only slightly. With a record number of job vacancies there should be scope to absorb many furloughed workers that are made redundant, back into the workforce. 

The effect may be more notable for London where the unemployment rate was already higher (5.8% in the 3 months to end August 2021), and while the numbers on furlough across the rest of the country fell rapidly, London saw its regional share of furloughed workers rise from 15% at the start of the year to 20%. Just ahead of the scheme close there were around 263,000 London residents on furlough. Whilst this suggests there are a high number of workers whose employment future is unclear, employment surveys for London (such as the PMI Employment Index) remain positive. The PMI Index is at its highest rate on record (since 1997) and the balance of private sector firms are looking to increase employment. 

Even ahead of the December interest rate rise, mortgage providers had started to price in a rate rise, which will become more apparent in reported mortgage data over the next few months. Likewise, the 10-year government bond yield has started to rise, tipping above 1% for the first time since April 2019.

Economic Overview – Year End 2021

September 2021 and beyond was always likely to be a useful litmus test for the number of employees physically returning to the office. And indeed, public transport data shows that TfL tube usage by the end of October was back to 63% of its pre-pandemic level, TfL buses to 76% and National Rail to 67% (although these rates dipped again slightly in November). Transport usage might well plateau at these rates long term; given that hybrid working (with workers continuing to work a few days a week from home) could be the new norm for a large share of the London workforce.

In December the Prime Minister increased restrictions in response to the Omicron variant including a call to return to work from home where possible. London quickly emptied out in the 10 days prior to the Christmas holidays as infections increased. It is impossible to know for how long these renewed restrictions will run, but transport numbers will reverse in the meantime. 

Economic Overview – Year End 2021

The Pret Index gives additional insight into how busy London has become. Their index, in a similar fashion to the transport statistics, tracks how busy their branch sales levels are versus a pre-pandemic benchmark. This suggests that activity in the West End is back above pre-pandemic levels, presumably boosted by early Christmas shoppers, and almost back to pre-pandemic levels at London stations. The City remains quieter, whilst London suburbs continue to benefit from the work from home phenomenon. Like the transport numbers the Pret index is likely to suffer some reversal in activity levels during December.

Economic Overview – Year End 2021

As we emerged from pandemic lockdowns it was always likely that retail and consumer confidence would have an uneven recovery. While in Q2 consumer confidence was running high, it began to dip slightly in Q3 as a number factors started to squeeze household budgets, fuel and food shortages in particular resulting in higher prices. 

Faltering confidence was apparent in the latest retail sales data; with 5 consecutive months of declines or no growth to end September. October data was better, improving 0.9% on the month and many retailers are optimistic that Christmas spending this year will be larger than typical after last year’s cancelled Christmas.

Economic Overview – Year End 2021

Economic Overview – Year End 2021
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