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>In March, UK retail disappointed to a shocking extent as food and non-store sales plummeted. This profile is not just a healthy rotation back to pre-covid spending habits.</li>
<li>Inflation demands more spending that isn’t affordable, so volumes get directly crushed while consumers get more cautious about the environment for major purchases. </li>
<li>GDP is at risk of declining in March. We expect zero growth and maintain our below-consensus Q2 forecast for 0.3% q-o-q GDP growth. Inflation hurts real activity. </li>
</ul>


In March, UK retail disappointed to a shocking extent as food and non-store sales plummeted. This profile is not just a healthy rotation back to pre-covid spending habits.
Inflation demands more spending that isn’t affordable, so volumes get directly crushed while consumers get more cautious about the environment for major purchases. 
GDP is at risk of declining in March. We expect zero growth and maintain our below-consensus Q2 forecast for 0.3% q-o-q GDP growth. Inflation hurts real activity. 


<ul>
<li>UK GDP growth stalled to 0.05% m-o-m in Feb-22 as temporary covid-related health spending ended. Another 1pp might be subtracted over the next few months.</li>
<li>Broader health spending remains bloated, symptomatic of the strains squeezing private sector activity as taxes increase to the detriment of long-term growth.</li>
<li>Inflation’s erosion of real incomes is a painful headwind, but the annual GDP rate benefits from carry-over effects. We forecast 1% q-o-q in Q1 and 4.1% in 2022.</li>
</ul>


UK GDP growth stalled to 0.05% m-o-m in Feb-22 as temporary covid-related health spending ended. Another 1pp might be subtracted over the next few months.
Broader health spending remains bloated, symptomatic of the strains squeezing private sector activity as taxes increase to the detriment of long-term growth.
Inflation’s erosion of real incomes is a painful headwind, but the annual GDP rate benefits from carry-over effects. We forecast 1% q-o-q in Q1 and 4.1% in 2022.


<ul>
<li>The BoE delivered a third back-to-back rate hike in March to 0.75%. However, Jon Cunliffe surprisingly dissented against a change now.</li>
<li>Some modest tightening “might be appropriate in the coming months”, consistent with another hike in May. The BoE now notes “risks on both sides of that judgement”. </li>
<li>We still expect a slower tightening pace (quarterly) beyond May as rates get closer to neutral (1.5%) and the peak passes in inflation pressures.</li>
</ul>


The BoE delivered a third back-to-back rate hike in March to 0.75%. However, Jon Cunliffe surprisingly dissented against a change now.
Some modest tightening “might be appropriate in the coming months”, consistent with another hike in May. The BoE now notes “risks on both sides of that judgement”. 
We still expect a slower tightening pace (quarterly) beyond May as rates get closer to neutral (1.5%) and the peak passes in inflation pressures.


BoE: Rates Hit Third Base During Home Run

<ul>
<li>The UK unemployment rate fell by 11bps to 3.9% as the labour force shrunk enough to offset stagnant employment levels. Gaps are more critical to monetary policymakers.</li>
<li>Unemployment is closing in on the BoE’s 3.8% forecast for Q1, historically consistent with the Bank rate at 0.75%, supporting another 25bps hike in March.</li>
<li>Wage settlements are responding to the tight market and inflation driving real terms declines. That should encourage additional rate hikes this year.</li>
</ul>


The UK unemployment rate fell by 11bps to 3.9% as the labour force shrunk enough to offset stagnant employment levels. Gaps are more critical to monetary policymakers.
Unemployment is closing in on the BoE’s 3.8% forecast for Q1, historically consistent with the Bank rate at 0.75%, supporting another 25bps hike in March.
Wage settlements are responding to the tight market and inflation driving real terms declines. That should encourage additional rate hikes this year.


<ul>
<li>Inflation has continuously exceeded expectations as traditional economic models fail to capture the regime shift. Prices are far below equilibrium and rising towards it. </li>
<li>We now incorporate this macro convergence at a micro-level, bridging the gap between approaches. This fix reflects the new distribution, including the higher median impulse.</li>
<li>The pull toward equilibrium cumulatively adds about 1pp to UK inflation over the year ahead, driving us further above the consensus. Second-round effects would extend it. </li>
</ul>


Inflation has continuously exceeded expectations as traditional economic models fail to capture the regime shift. Prices are far below equilibrium and rising towards it. 
We now incorporate this macro convergence at a micro-level, bridging the gap between approaches. This fix reflects the new distribution, including the higher median impulse.
The pull toward equilibrium cumulatively adds about 1pp to UK inflation over the year ahead, driving us further above the consensus. Second-round effects would extend it. 


UK 2Y (GUKG2 INDEX)

UK: Crushed Retail Will Hurt GDP

UK retail disappointed to a shocking extent as inflation bites. GDP is at risk of declining in March. We expect zero growth and maintain our below...

Phil Rush

UK: GDP Losing Its Health Support

UK GDP growth stalled to 0.05% m-o-m in Feb-22 as temporary covid-related health spending ended. Another 1pp might be subtracted over the next few...

Phil Rush

BoE: Rates Hit Third Base During Home Run

The BoE hiked again in March with a fourth back-to-back step on track for May. We still expect a slower tightening pace (quarterly) beyond May as...

Phil Rush

UK: Labour Market on a Tight Track

The UK unemployment rate fell to 3.9% on a falling labour force. Wage settlements are responding to the tight market and inflation. That should...

Phil Rush

Prices Obliterating Forecasts

Economic models fail to capture the inflation regime shift. Prices are far below equilibrium and rising towards it, with the pull adding about 1pp...

Phil Rush