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>UK GDP rebounded by 0.8% m-o-m to reach a record high level in Jan-22. Activity broadly brushed off the lingering covid restrictions.</li>
<li>We raise our Q1 GDP growth forecast by 0.1pp to 1.1%. Changing to that would be substantial for the BoE (0%) and consensus (0.6%), supporting another rate hike.</li>
<li>Growth slows more later in our forecast as the real income squeeze mounts. Painfully high core inflation underlying that means it is far from a dovish development.</li>
</ul>


UK GDP rebounded by 0.8% m-o-m to reach a record high level in Jan-22. Activity broadly brushed off the lingering covid restrictions.
We raise our Q1 GDP growth forecast by 0.1pp to 1.1%. Changing to that would be substantial for the BoE (0%) and consensus (0.6%), supporting another rate hike.
Growth slows more later in our forecast as the real income squeeze mounts. Painfully high core inflation underlying that means it is far from a dovish development.


<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. 


<ul>
<li>Monetary policymakers are rapidly back-peddling with the BoE hiking at consecutive meetings. Markets price this pace continuing to far higher levels than reached recently.</li>
<li>UK forward rates imply a neutral setting near 1%, whereas our macro estimates suggest it is nearer 1.5%. The US appears to be unwinding some of the Great Recession’s drop.</li>
<li>The BoE needs to feel where the neutral rate lies by watching the economy. If neutral feels high, policy can follow, but then it need not fall so far afterwards.</li>
</ul>


Monetary policymakers are rapidly back-peddling with the BoE hiking at consecutive meetings. Markets price this pace continuing to far higher levels than reached recently.
UK forward rates imply a neutral setting near 1%, whereas our macro estimates suggest it is nearer 1.5%. The US appears to be unwinding some of the Great Recession’s drop.
The BoE needs to feel where the neutral rate lies by watching the economy. If neutral feels high, policy can follow, but then it need not fall so far afterwards.


Policy Rates Feeling for a Higher Neutral

<ul>
<li>Only half of the retail sector’s horrible hangover recovered in Jan-22, and the mix still skews relatively far away from stores.</li>
<li>The end of draconian covid policies should support some more normalisation of spending patterns in 2023. Unfortunately, inflation is increasingly squeezing real income growth. </li>
<li>Such constraints tend to shrink retail volumes as consumers resist raising their spending values. For example, real wage weakness meant no real retail sales growth between 2010 and 2013.</li>
</ul>


Only half of the retail sector’s horrible hangover recovered in Jan-22, and the mix still skews relatively far away from stores.
The end of draconian covid policies should support some more normalisation of spending patterns in 2023. Unfortunately, inflation is increasingly squeezing real income growth. 
Such constraints tend to shrink retail volumes as consumers resist raising their spending values. For example, real wage weakness meant no real retail sales growth between 2010 and 2013.


<ul>
<li>The downtrend in the UK unemployment rate paused in Dec-21 as employment flatlined, and the population shrank slightly for the first time. </li>
<li>Unemployment is unlikely to match the BoE’s forecast, which should help slow hikes beyond March. The other side of an ageing cycle is wages, where the latest impulse was strong.</li>
<li>Inflation is more than eroding that, and the real-terms weakness will weigh on activity growth into 2022, ultimately preventing the Bank rate from going too high.</li>
</ul>


The downtrend in the UK unemployment rate paused in Dec-21 as employment flatlined, and the population shrank slightly for the first time. 
Unemployment is unlikely to match the BoE’s forecast, which should help slow hikes beyond March. The other side of an ageing cycle is wages, where the latest impulse was strong.
Inflation is more than eroding that, and the real-terms weakness will weigh on activity growth into 2022, ultimately preventing the Bank rate from going too high.


United Kingdom

The British Pound Sterling is the official currency of The United Kingdom. 

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UK: Output Brushes-Off Covid in Jan-22

We raise our Q1 UK GDP growth forecast by 0.1pp to 1.1% - that would be a big rise for the BoE (0%) and consensus (0.6%), supporting another hike....

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

Policy Rates Feeling for a Higher Neutral

The BoE needs to feel where the neutral rate lies by watching the economy. If it feels high, policy can follow it but then need not fall so far...

Phil Rush

UK: Consumers Face Inflation Constraint

Inflation is squeezing real income growth. Such constraints tend to shrink retail volumes as consumers resist raising spending values. Real wage...

Phil Rush

UK: An Ageing Cycle in the Labour Market

A slowing unemployment decline while wage growth rises suggests an ageing cycle. Inflation is creating real terms weakness that weighs on activity...

Phil Rush

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