The City View: Michael Hewson on problematic consumer spending growth
Today Andy Silvester talks to Michael Hewson, Chief Market Analyst at CMC Markets.
They unpick the latest wage and labour figures, analyse Bank of England governor Andrew Bailey’s comments at the Treasury select committee, go through inflation predictions for 2022, and discuss why current consumer spending growth in the US and UK will be problematic in the long run.
Andy also takes us through the headlines: Vodafone revenue in Germany has increased by 1.1%, and UBS has warned potential crypto investors that this is not the time to invest.
Episode transcript (auto-generated)
Andy Silvester 0:08 Good afternoon and welcome to the City View podcast live from the city a am offices in the square mile on what is by some distance the nicest there, the blue skies will be at no necessarily blue skies on the employment data which is out today. I’ll be talking about that with Michael Hewson from CMC markets in just a minute. But first the corporate headlines and it’s sort of good news if solid news all round from some of Britain’s biggest firms today Vodafone confirmed that it was making strides in Germany as well as maximising shareholder returns through growth, pushing forward market consolidation ambitions, they’ve got eyes on deals all of that, of course, with merger talk surrounding them, potential tie up with three allegedly on the cards or at least being considered. Elsewhere. Britvic saw sales shoot up in the last year, but they warned that inflation very much on the way and tech entrepreneur Vin Maria making another run at MNC Saatchi in his long running takeover saga. Now Maria, who is already a minority shareholder at the ad land giant going above the heads of the board, Director shareholders with an offer hoping to secure just enough of those shares that she doesn’t need the board’s recommendation to grab the rest. So interesting corporate work at play. Perhaps more interestingly, though, than all of the corporate news when we think about the wider world and what is to come, UBS this morning issuing a note on the crypto crash saying that investors should not be able to put a bottom on this saying that this is not the moment really to be going into crypto and that we have no idea how far this volatile market might fall. Definitely one to watch, as is the windfall tax Rishi Sunak today up in Parliament, saying that while he was not minded to move in that direction, just yet of whacking a massive tax on ng giant. That wasn’t to say that he wouldn’t in future he says, Look again around June July. Now, of course, that will coincide with yet another quarterly update from BP and Shell amongst others, which will surely grab the headlines again. So that’s one to watch. Man who has very strong opinions on the windfall tax, which we’ve discussed at length before views that I confess, I share Michael Hewson, the chief market analyst at CMC markets joining us as usual for his fortnightly hit, Michael, always pleasure to have you with us.
Michael Hewson 2:30 Yeah, good afternoon. Andy Silvester 2:32 We are in the midst of a very busy week for the governor of the Bank of England in particular. Yesterday was up in front, the Treasury select committee talking about inflation defending himself really in the bank’s approach over the past, however many months, notably impatient at some of the questioning, I thought, today, we had jobs numbers tomorrow, Wednesday, we’ve got inflation figures, and then more data out towards the rest of the week, which we’ll come and talk about, why don’t we just what let’s start with today. Before we look back at Bailey’s appearance yesterday, let’s look at those job figures and the wage figures in particular, because it suggests that the the labour market at least is is moving is changing is changing. We are in unprecedented times. Michael Hewson 3:21 It’s fairly tight. I mean, you look at the unemployment number falling to 3.7% is the lowest level since 1974. And what’s particularly notable, Andy was the Office for National Statistics easy for me to say, went on to say that for the first time since records began, there are fewer fewer unemployed people than there are jobs vacancies. So that suggests that the labour market is very, very tight. And we are starting to see evidence of that, certainly in the context of wages, and whatever Andrew Bailey says, and I’ve got to say that I think he really needs to go to public relations school, when he talks to these people is actually higher wages are fairly welcome, particularly at a time when the cost of living is getting more and more expensive. More importantly, food and energy is becoming more and more expensive. And people are struggling to get by on a day to day basis. And to be quite honest with you. I’m not sure it’s under the Bank of England’s remit to be calling, you know, sort of talking about whether or not people should be asking for above inflation pay rises. I mean, does he tell companies, they shouldn’t be putting prices up by more than the rate of inflation? So what is he doing in telling people that they shouldn’t be asking for above inflation pay rise, they should just basically plead the fifth on it and I’m sort of, you know, sort of, you know, referring to something that’s not relevant to the UK legislative chair, but he shouldn’t be commenting on the level of inflation. Andy Silvester 4:57 I think you’re right there and you know, it doesn’t pleases the fifth is absolutely fine in this case, because of course, that’s what he does on a fairly regular basis when he’s asked about what government should do yesterday in the treasury Select Committee, Bailey managed to say, and get the words out pretty often. So I’m not going to tell the government what to do. That’s not my role. So yeah, why is he telling ordinary Brits who are looking at, you know, their Tesco shop going through the roof, not to ask for a pay rise, because the impact on inflation, he sort of stopped shorter of where he where he ended up last time, yesterday. But it was interesting what he was talking about when he was talking about the labour market, because he suggested quite early on that. Around 80% of the inflationary pressure in the UK economy is coming from factors which are broadly out of the UK is kind of not only could the bank not do much about them, but really the UK government could do most of them. So it’s obviously supply chain gum UPS across the world. That’s obviously the war in Ukraine, pushing up food prices, et cetera, et cetera. He said only 20%. Of, of what we’ve got pushing inflation northward, is as a result of the labour market. But when you look at how tight it is today, and you see wages creeping up, regardless, as you say, what Andrew Bailey might say, it seems to suggest to me that there is an element of this that is becoming to use that phrase embedded in wage expectations at least. Michael Hewson 6:20 Well, you know, that’s that’s clearly nonsense. You know, I mean, if you look at where CPI was, at the end of last year, it was still above 5%. And the war in Ukraine, as far as I can share, well, as far as I can remember, started on February 24. So really, he’s talking how is that a bit like other x MPC members who are blaming most of the inflation impulse on Brexit, you look at US inflation, it’s actually higher, may not be tomorrow, when we get the UK CPI numbers, which are due to include the 54% rise in energy prices, and we’re expecting a record high UK inflation 9.1% on some estimates with the potential to go even higher. So I don’t really know where he gets that 20% number from, and there is a lot government can do for a start, they can stop putting tax rates up in opportune moments. So there’s that. So there’s all manner of things the Bank of England could have done for a start or the end of last year, they could have got their guidance. You know, they could have got their guidance and, you know, sort of intact and sorted out when they raised rates in December when they were looking as if they’re going to raise them in November, the behind the curve, ultimately. And I think he’s he’s trying to shift blame. And I think all central banks are on the curve, we look at the Federal Reserve, you look at you look at the ECB today, they’re starting to indicate that they might be looking to potentially raise rates this summer, by sort of floating the idea that they might go by 50 basis points in July, or, or, or even September, so there is an acknowledgement that they need to get ahead of this. And when you look at where inflation is, and where interest rates are, on a historical basis, interest rates are well below the level of inflation when inflation was last these sorts of levels. I can the 1980s 90s interest rates were above inflation, not below above. Andy Silvester 8:32 Yeah, I mean, the difference is going to be significant, mostly say when we get these inflation numbers out. We are expecting what I think 9.1% Michael Hewson 8:41 That is, and obviously we’ve also got PPI inflation 10%. So you’ve got those forward looking indicators. Not for one moment, am I suggesting that, you know, it’s gonna get really, really bad because I still also think that wage growth will continue to rise. When the numbers come out in April, you’ve had all of these supermarkets and retailers pushing up their wages well above the level of CPI, as it was at the time. So wages will follow inflation higher, obviously, there will still lag behind the hope being that the bulk of it, so 30 or 40%, the bulk of it, as we come to the end of this year, we will see inflation fall back below the level of wages. And I think that is really what the Bank of England is hoping will happen and certainly I think we’re all hoping that will happen. Andy Silvester 9:35 Yeah, no more so than Rishi Sunak I can tell you that. Yeah. Small days are at the end of the week. We had US retail sales today the UK will will offer its own up at the end of the week. But are we starting to see elements of the I mean, the US and UK it’s quite difficult to read the two across at the moment largely because of the difference in the energy market. But however the US retail sales today Michael Hewson 9:58 are pretty decent actually. It came in at naught point 9%, they were expecting a rise of 1%. So slightly below expectations, but the previous month’s numbers in March were revised higher. And every month this year, US retail sales have risen. But you’re quite right. The energy market is different. Obviously, natural gas prices are much lower. Obviously, the US government hasn’t imposed tax rises on its population, and the US economy does slightly had slightly higher levels of savings on the back of three different fiscal stimulus packages. So certainly, I think in terms of demand in the US economy, there is an awful lot more of it, even if consumer confidence levels are lower. So as the UK economy is concerned, apart from January retail sales, which are fairly decent, retail sales since then, have been negative. And I think that is the worry as we head towards the second quarter of this year, it’s unlikely that consumer spending is going to be a significant driver of UK second quarter GDP, particularly this month, when consumers are going to be basically counting their pennies. When it comes to, you know, obviously the rise in energy bills, tax rises, council tax rises, and other utility bill rises. But I am still fairly optimistic that as long as wages keep some semblance of trying to keep up, that things won’t be as bad perhaps, as a lot of people are predicting. And certainly the pound has popped higher today, on the basis of the fact that we could well see the Bank of England have to go an awful lot harder than they were originally guiding at their last meeting. It’s now about 124 pound against the dollar, which is welcome. Because it also pulls the inflationary impulse out of the Exchange Rate Mechanism that basically pulls inflation in by virtue of the value that is sliding against the dollar. Andy Silvester 11:57 One thing we should just talk about on consumer spending, just before you go Michael is around how much of that sector in the US a lot of it driven by credit, imagine a similar story in the UK as people start to start to employ their flexible friends a little more, that obviously has long term implications. And interest rates will naturally mean that you know, if, if any kind of consumer spending, yeah, gross. If there is any kind of consumer spending growth? Maybe if that’s driven by credit, actually, that’s almost more of a problem in the long term than a short term slowdown. Michael Hewson 12:31 It absolutely is. I mean, and the thing, one of the things I did notice about the latest US consumer credit numbers for February and March, February, consumer credit rose by $51 billion. That was followed by and that’s a record from a fairly weak number back in January. So there is a concern there that US consumers are starting to leverage up at a time when US rates are going higher. Now that suggests to me that perhaps there isn’t the level of excess savings that there is in the US economy than an awful lot of people think there is because if there was, why would you put money on a credit card if you’ve got it in a savings account, because we all know that credit card interest rates are quite high, and they’re not going to get any lower if the Fed continues to push rates higher. So I think there is a worry there. Whether or not we are right to be concerned about that. Only time will tell but certainly the last two months for US consumer credit, we did see a massive jump in borrowing on your own on us credit card. So that is a concern. Certainly going forward. Andy Silvester 13:38 Yeah, it could well be that when we looked at the savings numbers in the aggregate, an awful lot of those savings were concentrated amongst a very small part population. That may well be the case that certainly looks like this case in the UK, at least perhaps in the US as well. Michael, always pleasure. Thanks for joining us. Okay. That was Michael Hewson from CMC markets. And that’s all from us here at the City View podcast today. We’ll see you again tomorrow.