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>Extreme volatility in wholesale energy prices is spoiling the recovery, despite being off its highs. Administered household energy price changes concentrate the impact in different months around Europe.</li>
<li>Delivery of the current futures curve would cause the recent wintery spike to roll into a disinflationary lull for 2023. The spoil heap could easily extend even further in the event of a cold winter amid ongoing capacity constraints.</li>
</ul>


Extreme volatility in wholesale energy prices is spoiling the recovery, despite being off its highs. Administered household energy price changes concentrate the impact in different months around Europe.
Delivery of the current futures curve would cause the recent wintery spike to roll into a disinflationary lull for 2023. The spoil heap could easily extend even further in the event of a cold winter amid ongoing capacity constraints.


<ul>
<li>The UK recovery is disappointing in GDP terms again as output only rose by 0.4% m-o-m after a downwardly revised -0.1%. Our GDP growth forecast is marginally re-profiled but little changed overall, with H2 still tracking on the soft side of the BoE’s view.</li>
<li>Downside risks have increased with the recent energy price shock. Output does not appear to have suffered into October, but shutdowns would drive a nonlinear GDP response. Manufacturing could easily wipe out growth elsewhere during a cold winter.</li>
</ul>


The UK recovery is disappointing in GDP terms again as output only rose by 0.4% m-o-m after a downwardly revised -0.1%. Our GDP growth forecast is marginally re-profiled but little changed overall, with H2 still tracking on the soft side of the BoE’s view.
Downside risks have increased with the recent energy price shock. Output does not appear to have suffered into October, but shutdowns would drive a nonlinear GDP response. Manufacturing could easily wipe out growth elsewhere during a cold winter.


<ul>
<li>Green light: unemployment’s trend decline extended to 4.5% in Aug-21 on employment growth. Vacancies are at their highs, while redundancies are at their lows.</li>
<li>Red light: 5% of pre-covid payroll remains furloughed while the public sector is driving the rise in jobs. Industrial and consumer-facing businesses are struggling.</li>
<li>Elimination: frothy wage growth is evaporating with base effects and is on track to end the year near 3.2%. Headwinds should stop hawkish statements from turning to action.</li>
</ul>


Green light: unemployment’s trend decline extended to 4.5% in Aug-21 on employment growth. Vacancies are at their highs, while redundancies are at their lows.
Red light: 5% of pre-covid payroll remains furloughed while the public sector is driving the rise in jobs. Industrial and consumer-facing businesses are struggling.
Elimination: frothy wage growth is evaporating with base effects and is on track to end the year near 3.2%. Headwinds should stop hawkish statements from turning to action.


<ul>
<li>Capacity constraints, especially in energy markets, are squeezing inflation to higher and more persistent excesses. Despite disappointing demand data, the MPC sounds hawkish, encouraging market pricing for multiple rate hikes in 2022.</li>
<li>We still expect the first hike to postpone to Feb-23, but the risks skew earlier. Resilient labour market data would imply a bullish scenario was materialising, with a May-22 hike likely instead. De-anchored inflation expectations would drive more.</li>
<li>Markets should price a possibility of these hawkish scenarios but balance it with dovish ones related to a faltering recovery or even a return to recessionary lockdowns. Current guidance probably won’t lead to a policy response, in our view.</li>
</ul>


Capacity constraints, especially in energy markets, are squeezing inflation to higher and more persistent excesses. Despite disappointing demand data, the MPC sounds hawkish, encouraging market pricing for multiple rate hikes in 2022.
We still expect the first hike to postpone to Feb-23, but the risks skew earlier. Resilient labour market data would imply a bullish scenario was materialising, with a May-22 hike likely instead. De-anchored inflation expectations would drive more.
Markets should price a possibility of these hawkish scenarios but balance it with dovish ones related to a faltering recovery or even a return to recessionary lockdowns. Current guidance probably won’t lead to a policy response, in our view.


<ul>
<li>Recovering economic data imply that stimulus rose in H1 as neutral rates normalised. Disappointing demand data more recently suggest that the recovery wasn’t as complete as the BoE’s forecasts implied, though. The hawkish impulse of this rise has passed.</li>
<li>Market pricing of neutral has fallen with growth surprises to about 1% in the UK, consistent with our estimates of the neutral level. Plans for quantitative tightening mean an above-1% level is only plausible soon if inflation expectations de-anchor.</li>
</ul>


Recovering economic data imply that stimulus rose in H1 as neutral rates normalised. Disappointing demand data more recently suggest that the recovery wasn’t as complete as the BoE’s forecasts implied, though. The hawkish impulse of this rise has passed.
Market pricing of neutral has fallen with growth surprises to about 1% in the UK, consistent with our estimates of the neutral level. Plans for quantitative tightening mean an above-1% level is only plausible soon if inflation expectations de-anchor.


Neutral Rate’s Shadow Is Supporting Less

UK 2Y (GUKG2 INDEX)

Energy Price Spoil Heap

Extreme volatility in wholesale energy prices is spoiling the recovery. Delivery of the futures curve would cause the recent wintery spike to roll...

Phil Rush

UK: Output Limps Toward Energy Shock

The UK recovery is disappointing in GDP terms again. Downside risks have risen with the recent energy price shock. Output has not suffered into...

Phil Rush

UK: Green Light, Red Light, Elimination

Green light: 4.5% UR in Aug-21 on employment growth. Red light: 5% remain furloughed while the public sector is driving the rise in jobs. October...

Phil Rush

BoE: Signposts Splitting the Policy Path

Markets should balance pricing of bullish and inflation expectations breaking scenarios with dovish ones related to a faltering recovery or even a...

Phil Rush

Neutral Rate’s Shadow Is Supporting Less

The hawkish impulse of rising neutral rates has passed. Market pricing of neutral has fallen with growth surprises to about 1% in the UK,...

Phil Rush