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>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.


<ul>
<li>The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.</li>
<li>Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.</li>
</ul>


The mix of UK retail sales in Jun-21 made the outcome a disappointment, despite dull headlines. Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. The failure to normalise threatens the recovery’s extent.
Rising infections are fuelling a broader surge in disrupted behaviours. Several hundred thousand people are legally required to isolate with guidance and school closures afflicting double that again. We still expect the recovery to disappoint in H2.


UK: Retail Gorges on Failing Normalisation

<ul>
<li>The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.</li>
<li>Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.</li>
<li>Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.</li>
</ul>


The BoE has become more concerned about the size of its gilt holdings reducing future policy options: there is less to buy and more uncomfortable fiscal-monetary linkages.
Balance sheet problems can unwind by swapping the BoE’s gilt portfolio for T-Bills with the Debt Management Account. Undesirable linkages would break immediately as monetary and issuance functions are strengthened in their natural institutions.
Recycling these swapped gilts to the market instead of new gilt issuance would entirely normalise monetary policy space, intra-public sector linkages, and the tradeable free float by 2025-26. The BoE needs to innovate in its ongoing review of this, in our view.


<ul>
<li>Unemployment disappointed consensus expectations but matched our forecast of 4.8% in May-21. Bullish biases from lockdown surveys and support schemes are unwinding. We still expect the former to drive a slight rise to 4.9% in June.</li>
<li>About 10% of employees either remain out of work or on furlough, with ~3pp of those on part-time furlough where usage has been sticky and clogging up clearing in the labour market. Rapid headline wage growth is mostly about base and mix effects, though.</li>
<li>Residual restrictions are reinforcing behavioural changes that spread activity differently to pre-covid and the reallocation of resources between sectors, companies and areas should cause frictional weakness. We still forecast a UR peak of 6% in Q4.</li>
</ul>


Unemployment disappointed consensus expectations but matched our forecast of 4.8% in May-21. Bullish biases from lockdown surveys and support schemes are unwinding. We still expect the former to drive a slight rise to 4.9% in June.
About 10% of employees either remain out of work or on furlough, with ~3pp of those on part-time furlough where usage has been sticky and clogging up clearing in the labour market. Rapid headline wage growth is mostly about base and mix effects, though.
Residual restrictions are reinforcing behavioural changes that spread activity differently to pre-covid and the reallocation of resources between sectors, companies and areas should cause frictional weakness. We still forecast a UR peak of 6% in Q4.


United Kingdom

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

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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

UK: Retail Gorges on Failing Normalisation

Food sales offset widespread declines in opposition to the desired unwinding of retail’s rotation. Failure to normalise threatens the recovery’s...

Phil Rush

BoE: How to Unwind QE Concerns

Balance sheet problems can unwind by swapping the BoE’s gilts for T-Bills with the Debt Management Account. Undesirable linkages would break...

Phil Rush

UK: Jobs and UR Distortions Unwinding

Bullish biases from lockdown surveys and support schemes are unwinding. We still expect another unemployment rate increase to 4.9% in June before...

Phil Rush

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