Echoes of 2008 in UK monetary / labour market data
Simon Ward
4 Comments
The consensus is gloomy about UK economic prospects but is it gloomy enough?
The current debate has echoes of mid-2008. Q2 2008 was the first quarter of the most severe post-war recession. The consensus that summer was that the economy would eke out growth with a limited rise in unemployment and no need for significant policy easing.
A recession is widely acknowledged / expected now but the majority view is that it will be shallow and short-lived, partly reflecting recent energy price relief. Labour market damage is projected to be modest and there is general approval of recent MPC policy tightening.
Monetary trends warned of worse-than-expected outcomes in 2008 and are giving an equally negative message now.
The six-month rate of contraction of real narrow money (i.e. non-financial M1 deflated by consumer prices) was unchanged at 5.9% (not annualised) in December, close to a 6.1% peak reached in October 2008 – see chart 1.
Chart 1
As in 2008, the real money squeeze reflects both high inflation and nominal money weakness. Sectoral nominal money trends are uncannily similar to mid-2008. Corporate M1 and M4 are contracting rapidly, consistent with a sharp fall in profits and suggesting cuts in employment and investment – chart 2.
Chart 2
Household M4 is still growing modestly but there has been a large-scale switch out of sight into time deposits in response to rising rates – a classic signal of a shift in consumer behaviour from spending to saving.
A continued rise in employee numbers in recent months has fed a narrative of labour market “resilience” that is expected to persist. Data and complacency were similar in mid-2008. The quarterly employee jobs series rose into Q3 2008 but the stock of vacancies in June was already down by 9% from its peak, warning of trouble ahead – chart 3. The level of vacancies is higher now but the fall from the peak has been larger, at 14%.
Chart 3
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Reader Comments (4)
Is it gloomy enough? Almost certainly not. About the only positive thing you can say is other regions are in a similar position. Their forecasts therefore are even more optimistic.
It'll certainly be interesting to see what the labour market looks like in 2 or 3 quarters.
The most important thing is when central banks and fiscal policy react finally.
Then at least the where the bottom will be can be roughly charted.
In the USA, how much can this aspect count in postponing the recession?
Overall financial conditions improved to the levels of last June, when the fed fund rate was at 1.0%: all subsequent increases have therefore been cancelled.
This seems to go against the wishes of the Fed. Powell just doesn't know how to persuade traders and investors about his iron will to cool demand.
Hi Simon, some people are saying that the European credit spread wides in October were likely the wides for this entire cycle/bear market, arguing that everyone was extremely bearish amidst rocketing gas prices, which has now obviously unwound.
I still find this very hard to believe, given your real money analysis, extreme yield curve inversion, volatility (Vix etc) has yet to explode, and we haven't even entered severe recession yet. Interested to know if any of your charts hint that European credit spreads can still rocket higher at some point! Thanks as always!
Money trends will fully summarize financial conditions. If conditions have eased, this should be reflected in a recovery money growth, of which there is currently no sign. Widely quoted financial conditions indices exclude money.
Credit spreads historically have tended to peak around the time the stockbuilding cycle has bottomed. An exception was 2011, when the Eurozone crisis appears to have brought forward the peak. It’s possible that the gas price surge and collapse had a similar effect. The stockbuilding cycle isn’t due to bottom until H2 (or later) so another rise in spreads seems likely.