Chief Economist, Heteronomics

Phil Rush

Chief Economist

Heteronomics

Heteronomics represents a different kind of economics. We believe analysis should delve into the details of what is really going on, rather than using overly simplistic assumptions to quick-sell stories. Independence from myopic institutional pressures allows us to focus on the realities underlying your asset allocation decisions, without the conflicts of the old market structures. Heteronomics targets the themes driving UK asset prices, offering the benefits of depth, independence and ultimately price.

UK-centric macro research

Macroeconomics

<ul>
<li>Surging used car prices have supported inflation amid a backlog in demand for vehicles, restrictions on new car supply, and the entry of online car dealers. Although the trend currently feels one way, we see grounds for used car prices to fall in 2022.</li>
<li>New cars now look cheap where used prices have surged, especially given the way they are financed. A return of this supply restores substitutability and should lower used prices. Manufacturers probably won’t raise margins on UK sales with higher list prices.</li>
</ul>


Surging used car prices have supported inflation amid a backlog in demand for vehicles, restrictions on new car supply, and the entry of online car dealers. Although the trend currently feels one way, we see grounds for used car prices to fall in 2022.
New cars now look cheap where used prices have surged, especially given the way they are financed. A return of this supply restores substitutability and should lower used prices. Manufacturers probably won’t raise margins on UK sales with higher list prices.


<ul>
<li>Retail sales crashed in July, and together with downwards revisions, depressed the consensus by about 4pp. Weakness was broad-based and does not indicate a rotation back to services as restaurant bookings also declined that month.</li>
<li>The pingdemic forced almost a million to isolate, with many more disrupted. Legal obligations still impact ~700k in mid-August as quarantine mandates rise with holidays. Households continue to signal disappointment by not expecting to share in the recovery.</li>
</ul>


Retail sales crashed in July, and together with downwards revisions, depressed the consensus by about 4pp. Weakness was broad-based and does not indicate a rotation back to services as restaurant bookings also declined that month.
The pingdemic forced almost a million to isolate, with many more disrupted. Legal obligations still impact ~700k in mid-August as quarantine mandates rise with holidays. Households continue to signal disappointment by not expecting to share in the recovery.


<ul>
<li>UK inflation data for Jul-21 delivered mixed surprises, with the RPI a tenth stronger at 3.8% and the CPI softer at 2.0%. The latter was 0.3pp below-consensus and 12bps below our forecast on clothing and recreation moves, partly offset by car prices.</li>
<li>Respite from inflation is set to be fleeting as the surge to a Nov-21 peak will resume in August. Underlying pressures will also rise again but still suggest most of the overshoot is temporary. The peak looks increasingly likely to undershoot the bullish BoE forecast.</li>
</ul>


UK inflation data for Jul-21 delivered mixed surprises, with the RPI a tenth stronger at 3.8% and the CPI softer at 2.0%. The latter was 0.3pp below-consensus and 12bps below our forecast on clothing and recreation moves, partly offset by car prices.
Respite from inflation is set to be fleeting as the surge to a Nov-21 peak will resume in August. Underlying pressures will also rise again but still suggest most of the overshoot is temporary. The peak looks increasingly likely to undershoot the bullish BoE forecast.


UK: Reflationary Respite for BoE in Jul-21

<ul>
<li>The unemployment rate declined to 4.7% in Jun-21 on surprisingly jobs-rich growth. That is 12bps better than we expected, despite previously surveyed cohorts reporting higher unemployment. Stalled population growth flatters the employment rate.</li>
<li>About 8% of employees either remain on furlough or off-payroll since covid-hit. The normalisation of work is slowing after previous easy wins on re-opening. We still expect the UR to rise in H2, contrary to the BoE’s bullish forecast.</li>
<li>Headline wage growth has now surged to its spuriously elevated peak and will subside rapidly as the base effects flip. Wage growth in H1 was under 1.5%, which is less an inflationary concern than the flat provisional productivity estimate for H1.</li>
</ul>


The unemployment rate declined to 4.7% in Jun-21 on surprisingly jobs-rich growth. That is 12bps better than we expected, despite previously surveyed cohorts reporting higher unemployment. Stalled population growth flatters the employment rate.
About 8% of employees either remain on furlough or off-payroll since covid-hit. The normalisation of work is slowing after previous easy wins on re-opening. We still expect the UR to rise in H2, contrary to the BoE’s bullish forecast.
Headline wage growth has now surged to its spuriously elevated peak and will subside rapidly as the base effects flip. Wage growth in H1 was under 1.5%, which is less an inflationary concern than the flat provisional productivity estimate for H1.


<ul>
<li>UK GDP growth in Jun-21 was close to expectations overall. Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. The UK remains a global laggard, albeit to less of an extent as it re-opens.</li>
<li>Food, accommodation and health drove the June rise. Unfortunately, restaurant bookings and vaccinations rates dropped in July, which should unwind this support. Most other sectors are only limping up from still depressed levels.</li>
<li>The relatively hawkish BoE was at peak optimism on 5 August, in our view. We see the disappointment of its forecast in Q2 repeating during H2, delaying the first rate hike into 2023. Persistent damage from lockdown and covid seasonality drive that view.</li>
</ul>


UK GDP growth in Jun-21 was close to expectations overall. Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. The UK remains a global laggard, albeit to less of an extent as it re-opens.
Food, accommodation and health drove the June rise. Unfortunately, restaurant bookings and vaccinations rates dropped in July, which should unwind this support. Most other sectors are only limping up from still depressed levels.
The relatively hawkish BoE was at peak optimism on 5 August, in our view. We see the disappointment of its forecast in Q2 repeating during H2, delaying the first rate hike into 2023. Persistent damage from lockdown and covid seasonality drive that view.


UK 2Y (GUKG2 INDEX)

UK: Used Car Prices in a Hairpin Bend

New cars now look relatively cheap, especially given the way they are financed. A return of this supply restores substitutability, lowering used...

Phil Rush

UK: Retail Crashes into Pingdemic

The pingdemic crashed UK consumption in July and legal obligations still impact almost as many in mid-August. Households continue to signal...

Phil Rush

UK: Reflationary Respite for BoE in Jul-21

The UK CPI was 0.3pp below-consensus and 12bps below our forecast in July. Underlying pressures will rise again but the headline peak looks...

Phil Rush

UK: Jobs-Rich First Half to 2021

The unemployment rate declined to 4.7% in Jun-21 on surprisingly jobs-rich growth. Wage growth in H1 was under 1.5%, which is less an inflationary...

Phil Rush

UK: Rebound Passed Peak Pace

Rapid Q2 growth in the UK is the rebound from output being thrown down so much harder than in other countries. Disappointment of the BoE's forecast...

Phil Rush