Carry Me Home Down To Gasoline Alley!                                           15 October 2021

Q3 was the third best quarter, since 2009, in Dubai’s real estate transactions history when 15.9k transactions reaped US$ 11.54 billion. Property Finder estimated that 56.5% of the total was for secondary or ready properties, with 9.0k deals, worth US$ 7.86 billon, with off plan accounting for the 6.9k balance, valued at US$ 3.68 billion. The consultancy also noted that off-plan sales had the highest value of sales transactions since December 2013; the trend started to show a marked uptick earlier in the year, with the number of sales transactions between secondary and off-plan split almost evenly. Residential transaction volumes were 76.8% higher in the first eight months of the year, while secondary market transactions jumped 120.7% and off-plan transactions rose 39.0%. Quarter on quarter, the volume of off-plan transactions increased 14.7%, while the number of secondary market deals declined 6.0%. Over the period, the value of off-plan sales transactions jumped 47.1%, with the value of secondary sales deals marginally higher by 4.2%. The top areas for villa/townhouse secondary sales transactions were Damac Hills 2, Dubai Hills Estate, Arabian Ranches, Nad Al Sheba and The Springs. For off-plan sales transactions the leading locations were Arabian Ranches 3, Dubai Land, Tilal Al Ghaf, Dubai South and The Valley. The most popular areas for ready apartments were JLT, Dubai Marina, Meydan, JVC and Downtown Dubai.

Core’s latest Dubai Market Update estimates that a decade-record 37k residential units will be added to the emirate’s property portfolio in 2021; 24k, of which 86%, or 20.6k, comprised apartments – were delivered in the first nine months of the year, with the 13k balance expected in Q4. With investor confidence rocketing, the consultancy expects villa prices, which are already 16% higher YTD, to continue to rise due to limited stock available and end-users clamouring for villas, after the change in lifestyle and work requirements due to Covid-19. Major villa handovers were seen in Akoya Oxygen and Villanova, both in Dubailand, and Club Villas at Dubai Hills Estate, whilst Dubailand, JVC, MBR City and Business Bay are witnessing increasing delivery numbers. Apartment prices have only nudged 2% higher YTD, despite an increase in supply over the period. Major apartment projects handed over include Tiara United Towers in Business Bay, Artesia in Damac Hills, Bloom Heights in JVC and 52-42 in Dubai Marina. Core expects the recovery to be aided by fewer new launches, noting that YTD volumes are 47% lower than last year and 79% down on 2019’s returns. However, Q3 did witness transaction volumes up 108% on the year and 18% in 2019.

The UBS Global Real Estate Bubble Index 2021 notes that Dubai’s property sector is the only global market surveyed with the lowest price bubble risk among 25 leading cities and that the emirate’s real estate sector is an undervalued market. The study also commented that “improved affordability, easier mortgage regulations, higher oil prices, and an economic rebound now seem to have finally kick-started a recovery”. However, there was something of a caveat that “although construction has slowed, essentially limitless supply poses a risk for long-term appreciation prospects”. On a worldwide scale, the study indicated that, on average, the bubble risk had increased and there is a possibility of a severe price correction, with Frankfurt, Toronto, and Hong Kong exhibiting the most elevated risk levels on housing markets; it also elevated the bubble risk in Munich and Zurich, with Vancouver and Stockholm re-entering the bubble risk zone, joining Paris and Amsterdam already in the “zone”. It did conclude that a housing market recovery is likely to gain pace after the average house price jumped 6.0% over the past twelve months – its highest increase since 2014.

Azizi has launched three new fourteen-story properties to its master-planned Riviera community, located in MBR City. These will see a further 439 units (252 studios, 84 1 B/R, 84 2. B/R and nineteen retail units) added to the community’s portfolio. Each building will feature a swimming pool, vast landscaped areas, a fully equipped gym, a barbeque area, a children’s playground and a yoga space. The development will also have access to a 2.7km crystal lagoon, encompassing an area of over 130k sq mt, with the community boasting several basketball and tennis courts, an extensive jogging and cycling track, and other common facilities.

This week, Prescott announced the launch of Prime Residency III, their US$ 38 million contemporary residential development in Al Furjan. The G+2P+7 residential project will be a mixed-use development, with spacious studios and one B/R apartments, along with a swimming pool, kids’ pool, gym, residents’ lounge and a rooftop garden; prices start at US$ 100k. The developer has also introduced a payment plan, with a 10% down payment, 10% after three months, followed by four quarterly 5% instalments, 10% on handover, and 50% post-handover over 3 years.

As an indicator that the emirate’s property market continues to head north, wasl properties managed to lease 130 units of its residential portfolio in only forty-five minutes, as part of its promotional drive which coincides with the inauguration of Expo 2020. The developer’s campaign, which runs throughout the month, includes 2k units from its residential portfolio across Dubai, three hundred of which were leased on the first day. The current offer for a one-year lease includes a US$ 1.4k discount, with twelve monthly instalments, 0% commission fees and security deposits, as well as a one-month grace period.

Dubai’s largest foreign exchange company, Al Ansari Exchange, noted a surge in transactions made by non-residents during the first ten days of October 2021, which coincided with the start of Expo. It posted that all transactions at their branches were 69% higher than the first ten days of the previous month. Interestingly, the number of foreign currency purchase transactions by non-residents was 9% higher compared with the same period in 2019. Expo is the main driver behind this mini surge, but other factors such as the resumption of flights, especially from India and Saudi Arabia, return of in-person conferences and events and growing economic activities in the country also played their parts. By 10 October, more than 411k visitors had visited the exhibition, a third of whom were from overseas.

UAE’s H1 non-oil foreign trade jumped 27.0% to US$ 245.2 billion, with exports, 44% higher on the year at US$ 46.3 billion and imports up 24% to US$ 131.3 million. During the period, gold exports rose 48% to US$ 19.1 billion; it was estimated that 87% of the country’s non-oil exports were locally made, with the balance coming from free zones and customs warehouses.

September’s IHS Markit Dubai Purchasing Managers’ Index showed a 1.8 seasonal adjusted decline to 51.5, but was still in positive territory, as it continued its growth for the tenth consecutive month. Although new business declined in the month, output continued to expand, and with the start of Expo 2020, and the economic rebound from Covid restrictions, it is expected that sales will continue to rise in the services sector over the next six months. The marginal fall in new business was attributed to weaker demand and discounts at competing firms, with the construction sector leading the decline, as new work fell for the first time since June. Meanwhile, travel and tourism companies saw a sustained upturn in sales, as confidence in the sector reached a five-month high. Although business confidence continued to improve, hiring was dragged back by a decline in new orders but still managed to record its second strongest expansion in over a year.

According to the findings of the Dubai Chamber’s Q3 Business Leaders’ Outlook Survey, business confidence in Dubai reached its third highest level in a decade, with the main driver being the start of Expo 2020; the confidence level saw 76% of respondents looking forward to an improvement, compared to 66% and 48% in the previous two quarters. Two drag factors noted were global supply chain restrictions and a rise in global commodity prices. Meanwhile, the Chamber’s President and CEO, Hamad Buamin, commented that the growing optimism was down to increased government support for the private sector, success in overcoming Covid-related challenges, new business incentives, easing travel restrictions and higher oil prices. He also noted that trade, tourism, hospitality and logistics are the sectors that are expected to see the most business activity during Expo 2020 Dubai, with a knock-on effect felt in other market segments.

A record US$ 5.2 million tender for a 118.6 carat rough diamond was sold at the Dubai Diamond Exchange this week, hosted by Trans Atlantic Gems Sales, a world leading rough diamond tender and auction house. Last December, Stargems’ tender resulted in US$ 87 million worth of rough diamonds in one diamond tender event. Ahmed bin Sulayem, Executive Chairman and Chief Executive Officer, DMCC, commented that “this tender is yet another achievement that adds on another successful tender at the Dubai Diamond Exchange”. He also noted that “with the trade gap between Antwerp and Dubai now less than a billion dollars, our position as a transparent and highly-regulated market has made us the go-to for legitimate traders who are seeking a fair price for their diamonds, particularly those based in Africa.” Following the recent MoU with the Israel Diamond Exchange, the DDE is set to further boost regional trade and support the growth of the global diamond industry.

According to Dubai Economy’s latest report, over 6.9k new business licences, (of which 56% were professional and 43% commercial), were issued in September – 68% higher than a year earlier. 67.2% and 32.7% of the licences were issued for companies in Burj Dubai and Deira. By legal categories, sole establishments, LLCs and civil companies accounted for 36.0%, 25.5% and 22.0% of the trade licences issued.

As Dubai’s high-net-worth population surged 3.8% to 54k in the first half of 2021, and in a bid to encourage family businesses to establish Single and Multiple Family Office (SFO & MFO) licences, the Dubai World Centre Authority Trade has announced updated regulations for the free zone. It is hoped that these would address the needs of family-run entities and introduce a new platform for wealthy families to set up offshore holding companies to manage their private family global wealth, assets and investments from Dubai. It is felt that there is a need for a specialised legal and regulatory framework that offers distinct flexibility and fundamental benefits for setting up single and multiple family offices. Offshore entities, founded directly by members of a single-family, to own and manage their collective wealth, assets, businesses and investments through incorporating a new Free Zone Establishment (FZE) or Free Zone Company (FZCO), will be subsequently licensed to operate from the free zone.

At the Tuesday Cabinet meeting, held in the UAE pavilion at Expo 2020, HH Sheikh Mohammed bin Rashid adopted a five-year, US$ 79 billion federal budget. In a bid to unify federal and local housing efforts, co-ordinate on road and infrastructure projects, and build an urban and housing road map for the UAE, the Cabinet approved the establishment of the Emirates Infrastructure and Housing Council, headed by Suhail Al Mazrouei, Minister of Energy and Infrastructure. The meeting also discussed how to enable a faster-working government and the adoption of cyber security standards for government agencies and those proposed by the Emirates Cyber Security Council. HH Sheikh Mohammed noted that “our work will not be based on individual ministries, but on strategic sectors, and plans and agendas will not be the standard, but field projects and initiatives.”

HH Sheikh Mohammed bin Rashid Al Maktoum has reiterated that the UAE will remain “everyone’s country and everyone’s home”, after an Arab Youth Survey indicated that 46% of the sample said the UAE was the preferred country to live in for Arab youths, well ahead of the USA (19%) and Canada (15%). In his tweet, the Dubai Ruler also added that “our experience will remain available to everyone. .  .  .  . and our relations will remain positive with everyone.”

DP World has announced a partnership with UK’s CDC Group to create a long-term investment platform. The local ports operator will contribute its stakes in three existing ports initially and expects to invest a further US$ 1 billion over the next several years, whilst the development finance institution and impact investor is committing an initial US$ 320 million and a further US$ 400 million over the next several years. The transaction is subject to certain final regulatory approvals. The platform will be African focussed, investing in origin and destination ports, inland container depots and economic zones.

At the First Dubai International PPP Conference, held at the Expo’s regional tourism and business hub, almost US$ 7 billion worth of projects were announced. They included seven development projects, valued at US$ 6.158 billion, fourteen involving road/transport, worth US$ 654 million, and eight in the health/safety sector, totalling US$ 143 million.

At a court hearing, and following a case brought against it by creditors, Marka was declared bankrupt, and all of its assets brought into liquidation and the board members were required to pay up to US$ 122 million to outstanding creditors; the decision also applies to all the Marka subsidiaries. The ruling also confirmed that the company’s managers and directors were stripped of all rights to manage the company or its subsidiaries. Furthermore, they cannot manage or dispose of the company’s funds, pay out any claims or borrow any sums under its name. In addition, they will have to hand over to the court-appointed bankruptcy trustee all funds and documents of the company within five days of the date of the ruling. Formed in 2014, the US$ 75 million float offering was 360 times oversubscribed, and on its first trading day, its share value closed 59% higher. Marka was to be a holding enterprise for a range of global fashion and accessory brands, as well as F&B concepts, and, starting from scratch, it went on a buying spree. However, some of its investments failed to live up to their initial promise it and was hit by the sudden and steep drop in oil prices from mid-2014, racking up debts of over US$ 182 million and never having made a quarterly profit in its short history. The DFM suspended its trading in May 2018.

This week, Emaar Properties’ shareholders approved the developer’s mergerwith its retail and shopping mall unit – Emaar Malls – of which it already owned an 84.6% stake. The merger has already been approved by the industry watchdog – the Securities & Commodities Authority. At the meeting, it also won approval to boost its share capital to US$ $2.2 billion. Under the arrangement, shareholders will receive 0.51 Emaar Properties’ shares for each share held – equating to a 3.5% premium on the 01 September Emaar Malls’ share price. The existing Emaar Malls’ business will be reconstituted, within its wholly owned subsidiary, and will continue to develop and hold a portfolio of premium shopping malls and retail assets,

The DFM opened on Sunday, 10 October, 78 points lower the previous fortnight, gained 17 points (0.6%) to close the week on 2,789. Emaar Properties, US$ 0.02 higher the previous week, lost US$ 0.02 to close at US$ 1.07. Emirates NBD and Damac started the previous week on US$ 3.50 and US$ 0.34 and closed on US$ 3.73 and US$ 0.34. On Thursday, 14 October, 112 million shares changed hands, with a value of US$ 43 million, compared to 130 million shares, with a value of US$ 39 million, on 07 October.

By Thursday, 14 October, Brent, US$ 9.24 (6.7%) higher the previous fortnight, gained US$ 2.06 (2.5%), to close on US$ 84.49. Gold, US$ 19 (1.1%) lower the previous week, gained US$ 37 (2.1%) to close Thursday 14 October on US$ 1,796.

After years of negotiations, Air India has a new owner, with Tata Sons winning a US$ 2.4 billion bid, including equity and debt, finally privatising the troubled national carrier. Tata – which already manages Vistara, India’s only other full-service carrier, in a venture with Singapore Airlines as well as budget airline AirAsia India, a venture with Malaysia’s AirAsia Group – will take on US$ 2 billion of Air India’s US$ 8.2 billion total debt, resulting in an equity value of only about US$ 400 million which it will pay to the government. It is estimated that over the past decade, the loss-making airline has cost the Indian government the equivalent of US$ 3 million every day. It could be the forerunner of many state-owned entities to be sold to private companies that would push India into becoming a fully market-driven economy.

The English Premier League has finally approved the US$ 415 million takeover of Newcastle FC by a Saudi Arabian consortium, led by Public Investment Fund, (who will provide 80% of the funding), after receiving “legally binding assurances” that the Saudi state would not control the club. PCP Capital chief executive Amanda Staveley, a 10% owner, will take a seat on Newcastle’s board, while Yasir Al-Rumayyan, the governor of PIF, will be the non-executive chairman. To the relief of many of its legion of fans, it sees the end of the fourteen-year reign of Mike Ashley. With PIF’S assets totalling US$ 340 billion, it makes Newcastle a rich club and one with cash to boost its playing resources. A deal was initially agreed in April 2020 but was held up by several outstanding issues, but this seems to have been resolved after Saudi Arabia settled an alleged piracy dispute with Qatar-based broadcaster BeIN Sports, which own rights to show Premier League matches in the Middle East.

A McKinsey report noted that, in 2020, the global payments industry posted its first contraction in eleven years, declining 5.0% to US$ 1.9 trillion. However, the consultancy is confident that the industry will bounce back this year, to almost record levels seen in 2019 and could top US$ 2.5 trillion by 2025, driven by the digitisation of consumer and commercial transactions. Covid saw the sector undertake many changes, as consumers increasingly adopted digital platforms to shop, study and work online. Although the sector will also benefit from an improvement in the global economy, interest margins are likely to remain muted.

Reports indicate that Apple may slash Q4 production of its iPhone 13 by at least ten million, from an initial ninety million forecast, due to the ongoing global computer chip shortage; the news saw its share value fall 1.2% on Tuesday. Like other sectors, such as the car and video game console makers, Apple, one of the biggest chip purchasers in the world, has been badly impacted. It was only last month that the tech giant introduced four new iPhone 13 models – iPhone 13, iPhone 13 mini, iPhone 13 Pro and iPhone 13 Pro Max – and started shipping on 24 September. If consumer demand for the new iPhone continues, it is estimated that Apple will be running a shortage of more than five million iPhone 13 units for the festive season.

To those who think the current disruption to global supply chains is a short-term problem, Ikea has issued a wakeup call. The Swedish furniture giant says, that despite some improvement having been noted, it expects the disruption to global supply chains to continue until at least the end of Q3 2022. Last month, Ikea said it was struggling to supply 10% of its stock, or around 1k product lines, to its twenty-two stores in the UK and Ireland, amid the continuing shortage of HGV drivers. The problem was partially solved by Ikea embracing its need to meet customer needs and take on “the new competition”, by ramping up online sales, resulting in a two-year strategy taking just two months to implement. Poundland has also predicted that pressure from supply chain problems will last into 2022, and noted that shipping costs had soared, and that “there are sometimes where we have had to pay ten times our normal rates”.

After four years of negotiation, agroup of 136 countries, accounting for over 90% of the global economy, has agreed to set a minimum global tax rate of 15%, (well below the average 23.5% rate levied in industrialised countries), for big companies. The aim of the exercise is to make it harder for them to avoid taxation which seems to finally end a four-decade-long “race to the bottom”. Since the eighties, several countries have stood out by introducing a lighter tax regime, with the aim of attracting international investment. The OECD estimated that an annual US$ 150 billion in new revenues could be collected, whilst taxing rights on more than US$ 125 billion of profit would be shifted to countries where big multinationals earn their income. The global minimum tax rate would initially apply to overseas profits of multinational firms with more than US$ 867 million in global sales. Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top up” their taxes to the 15% minimum, eliminating the advantage of shifting profits. The agreement calls for countries to bring it into law next year, so that it can take effect by 2023, with those countries that have already created national digital services taxes having to repeal them by then.

The World Bank has estimated that the pandemic has cost the sixteen countries in the Mena region US$ 200 billion, based on measuring the estimated GDP of each country, compared to what actually happened because of Covid; the forecast growth was 2.8% in 2021 but the actual was a 3.8% contraction. By the end of 2021, the region’s GDP per capita will still be below the 2019 level by 4.3%. The 2021 GDP growth rate across the region will be highly uneven ranging from Lebanon’s minus 9.8% to Morocco’s growth figure of 4.0%. It is also a sad reality check that Mena’s health systems, which were considered relatively developed, buckled and were unable to fully cope with the ramifications of the crisis; any recovery is dependent on the capabilities of each country’s health system and their exposure to rising commodity prices.

According to a World Bank report, the debt burden of the world’s low-income countries jumped to US$ 633.5 billion – 12.0% higher on the year – because of the impact of Covid. Global governments brought in fiscal, monetary and financial stimulus measures to soften the burden on their respective economies, but this obviously came with a price and for all countries, that price was a much-increased debt burden. Unfortunately, it was the world’s poorest countries which suffered the most and now the World Bank is calling for “a comprehensive approach to the debt problem, including debt reduction, swifter restructuring and improved transparency.” This stance is also in line with the UN Conference on Trade and Development statement that “sustainable debt levels are vital for economic recovery and poverty reduction.” In short, such economies are being hit by the double whammy of slowing economic growth and public and external debt at elevated levels. The World Bank estimated that low and middle-income countries’ external debt-to-GNI ratio, excluding China, rose 5% on the year to 42% in 2020. This problem is not going away.

Australia’s second largest bank saw its share value dip 1.3% on Monday on news that it would be taking a US$ 960 million hit, mainly attributable to a US$ 710 million write-down after it quit energy trading and lowered its outlook due to “subdued” financial markets. Westpac also noted that there were one-off charges, including provisions to pay out customers seeking remediation for wrongly charged fees and costs associated with the sale of its life insurance unit; furthermore, there were also legal costs, customer refunds and litigation provisions, totalling US$ 127 million, bearing in mind that the bank is currently being pursued by ASIC over consumer credit insurance.

Two years after its main adversary, Crown Resorts, was hit by allegations, that it enabled illegal activity at its casinos for years, Star Entertainment is now facing similar claims brought by three news outlets implicating the firm in suspected money laundering, organised crime and fraud. Star has since commented that “we will take the appropriate steps to address all allegations with relevant state and federal regulators and authorities.” According to the report by the Sydney Morning Herald, the Age and 60 Minutes, Star had been warned that its anti-money-laundering controls were inadequate, but that in the seven years to 2021, it had wooed high-rolling gamblers, who were allegedly linked to criminal or foreign-influence activities. The worry for the markets is that Star may go the same way as Crown which had to face a series of public investigations into the firm that has left its future in doubt; earlier in the year, the NSW state gaming authority said Crown was unfit to operate its casino in Sydney after an official inquiry found it had facilitated money laundering. It was a well-known fact that until recently the only way to make money from a casino was to buy its shares – with Star shares tanking 23% on Monday, playing the roulette wheel may be a better option.

An ABC report estimates that over US$ 600 million in political payments disclosed over twenty-two years is linked to entities with a stake in gambling. Since political donations are mired in murky territory, this estimate is at least double the amounts identified by previous analyses, and yet almost surely an underestimate. The true figure is impossible to calculate because loopholes in the laws governing political donations mean that more than a third of the money poured into the political system is “dark money”, whose source remains unknown.

Talking about gambling, Bonza, a new domestic budget airline, backed by the US investment firm 777 Partners, will be launched in Australia early next year. In a country that has seen strict Covid restrictions until recently, and that already has four national carriers – Qantas, Jetstar, Virgin and Rex – this seems to be a risky venture. It will launch with a fleet of new Boeing 737-8 aircraft and will possibly fly into some forty-five Australian airports, that are potentially capable of handling the new planes; it will not target the lucrative “Golden Triangle” of Sydney-Melbourne-Brisbane. Bonza is currently awaiting necessary regulatory approvals before it can take to Australia’s skies.

Although the Australian Treasury confirmed that it paid US$ 19.8 billion in its JobKeeper programme to businesses whose turnover either increased, or did not decline as much as required, it has dismissed calls to introduce a clawback mechanism; its argument centred on the fact that a different design of the scheme would have cost jobs and delayed economic recovery and that its introduction saved up to 700k positions. Without the government’s significant fiscal support, including JobKeeper, Treasury had estimated that the unemployment rate would have peaked at least 5% higher, and remained above 12% for two years. To qualify for government support, businesses with a turnover of less than US$ 730 million, (AUD1 billion) needed to forecast a 30% decline in revenue in any single month or quarter of the first six-month period; those with a higher threshold had to forecast a 50% decline. In the first three months of the scheme, internal analysis by the Treasury indicated that US$ 8.4 billion, (AUD 11.4 billion), went to entities that did not suffer their forecast 30% or 50% drop in turnover; the following three months saw a figure of US$ 11.4 billion, (AUD 15.6 billion) being paid out in September to businesses that did not suffer their forecast 30% or 50% drop in turnover. Of the total of US$ 27 billion, US$ 9.6 billion went to businesses whose fall in turnover was less than forecast in the first six months, whilst the balance of US$ 10.2 went to businesses that enjoyed higher than forecast turnover. 

Whilst apparently absolving itself from any blame or mismanagement, Treasury noted that its “report demonstrates that JobKeeper was more than just a wage subsidy. It was designed to ensure the strongest possible economic recovery and avoid the scarring impacts on the labour market, which were characteristic of previous recessions. JobKeeper was specifically designed, not as a furlough scheme, but as one that enabled businesses to adapt and stay open. It was this feature, combined with the six-month guaranteed support and the absence of a clawback mechanism, that allowed JobKeeper to not only save jobs, but to create them.” (There must have been some top Aussie Rules players helping with the report). Several federal politicians are calling for transparency register, (such as the one in New Zealand), which shows how much firms with more than US$ 730 million turnover received under the scheme.

JobMaker was a key announcement in the October 2020 federal budget, delivered by Treasurer Josh Frydenberg, and intended to boost the Covid recession recovery; at the time, he estimated that “this will support around 450k jobs for young people.” Reality was different and in the nine months to 06 July 2021, there were only 4.1k companies — described as ‘entities’ with an Australian Business Number (ABN) — that had a processed claim through the scheme. The hiring credit paid employers up to US$ 272 a week for creating new jobs for people aged 16 to 29 years who were on JobSeeker, Youth Allowance, or the Parenting Payment, and US$ 136 a week for 30- to 35-year-olds. At the time there were concerns that employers could sack older, more experienced employees, and replace them with young workers earning a third of the salary and get the taxpayer funded JobMaker credit to make it cost no more, as well as possible problems that the US$ 3.0 billion scheme could be illegal under laws that aimed to prevent age discrimination.

It does appear that hundreds of thousands of Australians may have given up on searching for a job. There were  reports that a further 138k  jobs were lost in September, as Australia’s two most populous states, NSW and Victoria, struggled through extended lockdowns, nudging the unemployment level 0.1% higher to 4.6%; this figure would have been higher if it were not for a marked weakening in the participation rate which hit a fifteen-month low of 64.5% of people aged 15 and over currently working or actively looking for work. There are now 111k fewer people employed than before the first lockdowns in March 2020. Over Q3, participation in the labour force declined by 333k, as employment dropped by 281k people. With statistics like these, it is all but inevitable that the labour market will not fully recover until Q3 next year.

Last Friday, the US Senate voted 50-48 to temporarily raise the nation’s debt limit, by US$ 480 billion, avoiding a historic default and keeping the country open until early December. Only the intervention of Republican senate leader, Mitch McConnell, saved the country being two weeks away from being unable to borrow money or pay off loans for the first time ever. The bill will now go to the House of Representatives for approval, before being signed into law by President Joe Biden. Senate Republicans have previously argued that raising the debt limit was the “sole responsibility” of Democrats because they hold power in the White House and both chambers of Congress; they are also frustrated by new spending proposals the Democrats are trying to push through without Republican support. Any future default could have major economic repercussions, including a cut in the country’s credit rating (and thus higher interest payments) and throwing the global economy into financial turmoil.

Although its September unemployment rate dipped 0.4% to 4.8%, (equating to 7.7 million) on the month, the US only managed to add a disappointing 194k jobs last month, to the national payroll, as the Delta variant of coronavirus continued to drag on the economy. The market was expecting a figure nearer to 500k, but it is noted that readings were taken on 13 September, when daily Covid rates still hovered around the 150k level but have since fallen by a third. Although positions in education dipped, there were marked gains seen in hospitality, retail and transportation. A largely unchanged 61.6% labour participation rate seems to indicate that people, who left the workforce during the crisis, have yet to return to employment. Recently Fed Chair, Jerome Powell, noted that “it would take a reasonably good” September employment report to meet the central bank’s threshold for reducing its massive bond buying programme; with these figures, and the fact that Q3 GDP growth, at 1.3% was well down on the previous quarter’s 6.7%, it seems that the Fed will delay any tapering move until consumer confidence notches higher and the leisure, hospitality, and retail sectors return to some form of normalcy.

The Pensions and Lifetime Savings Association has estimated that a single person in the UK requires a post-tax annual income of US$ 15k for a minimum standard of living in retirement, and a couple US$ 23k; for the first time,Netflix subscriptions and items such as haircuts were included on the assessment. These figures for a minimum standard have risen by around US$ 1k since 2019 and would normally comprise the US$ 13k state pension plus some workplace pension savings. The calculations for retirement living standards are pitched at three different levels – minimum, moderate and comfortable.  A moderate living standard, including a two-week holiday in Europe and more frequent eating out, requires US$ 28.5k for a single person and US$ 41.8k for a couple. For a comfortable retirement living standard, the annual budget rises to US$ 45.9k and US$ 67.9k; this includes items such as regular beauty treatments, theatre trips, and annual maintenance and servicing of a burglar alarm. Currently, housing costs are not included on the assumption that most pensioners have paid off mortgages and it is estimated that only one in six is projected to have an income between moderate and comfortable.

There is no doubt that food inflation is having a major impact on UK household spending, with prices for all major basic food commodities heading north. Much of these rises have been put down to various causes, including poor harvests in Brazil, (which is one of the world’s biggest agricultural exporters), drought in Russia, reduced planting in the US and stockpiling in China, allied with more expensive fertiliser, energy and shipping costs to push prices up. In the UK, there are the added problems of lack of HGV drivers, a shortage of labour in certain areas of the economy and a major energy crisis. The end result is that all food producers are facing the same tide of price hikes, most of which will have to be borne by the end consumer. According to the UN Food and Agriculture Organisation, the cost of ingredients, such as cereals and oils, has pushed global food prices to a 10-year high. With inflation “across the board”, people will just have to get used to increased food prices, as producers will inevitably pass a higher proportion of increased costs onto the end user.

There are several factors that have played an important role in pushing up UK and global energy prices this year; it is estimated that in the UK, Europe and Asia, YTD prices have jumped 250%, including 70% since August. There are various reasons, both nationally and globally, put forward for the price hikes including a global squeeze on gas and energy supplies, as countries emerged from lockdown and industry re-opened, a European cold winter put pressure on supplies, as did a colder than normal Asian winter and a shortage of UK gas storage facilities ensured that its “in-house” supplies soon emptied, and they were exposed to the increasing wholesale prices. Then there is the possibility that Russia, a major energy provider, may be playing politics and restricting output.

Much has been written about its impact on households and industry hit by soaring energy costs. Domestic energy consumers had a certain amount of protection from rising prices due to a price cap, which sets the maximum price suppliers could charge customers on a standard – or default – tariff. However, the cap was increased on 01 October, leaving some fifteen million households facing a 12% rise in energy bills.

Industry has no such cap, meaning they are open to the risk of an unlimited rise in prices. Certain sectors, including ceramics, paper and steel manufacturing, have petitioned the government for a price cap, otherwise many would have to close down.  For example, a large UK container glass plants has estimated that its “normal” annual energy cost would likely jump from US$ 54.50 million (GBP 40.0 million) to US$ 136.3 million, (GBP 100.0 million); the UK cost is more than a majority of its overseas competitors. Already manufacturers and services are warning they will have to pass on their rising costs to consumers, and as energy costs are a big driver of inflation, few consumers and households will escape the consequences of the current crisis.

As more people dined out, went on holiday and attended music festivals, the UK economy grew by 0.4% in August and is now only 0.8% smaller than it was pre-pandemic; July returns were amended from an earlier 0.1% growth to minus 0.1%. The services sector was the biggest contributor to the monthly improvement, as arts, entertainment and recreation grew 9%, boosted by sports clubs, amusement parks and festivals. Demand for hotels and campsites recorded a 22.9% growth, with activity in accommodation and food services rising 10.3% in August. Although air and rail travel benefitted because of the further easing of Covid restrictions, both sectors were trading far below pre-pandemic levels. Construction output dipped 0.2% and is still 1.5% lower than pre Covid but the manufacturing sector fared better being 0.5% higher, driven by an increase in vehicle production. With business confidence fading and supply chain disruptions continuing, it is highly unlikely that the UK will return to pre-pandemic levels until the end of Q1 next year. Rising inflation, driven by significant increases in energy prices, and the recent cut in Universal Credit, will continue to impact on consumer spending and will have a negative effect on UK’s GDP growth for the rest of 2021.

In September, the UK recorded a monthly rise of 207k new jobs to bring the total employment figure to a record 29.2 million, as the unemployment level came in at 4.5%, (compared to 5.2% at the end of 2020), but still down on the 4.0% pre-pandemic level. However, the country is facing a strange anomaly – even with another record high of job vacancies, at 1.2 million. The economy has a chronic labour shortage in certain sectors – and labour shortages invariably impact negatively on economic growth. They include retail and motor vehicle repair, reporting the largest increases, along with accommodation, food services, professional activities and manufacturing. A desperate shortage of HGV drivers has led to supply chain chaos and concerns of a spiral in wages and prices, with underlying wage growth at between 4.1% and 5.6% in the quarter to August, well above the 3% seen before the pandemic. Two weeks ago, the Treasury invested a further US$ 681 million in fresh job support funding aimed at getting people into new or better jobs. The Bank of England is notorious because it seems that it can never get its inflation forecast correct; for a long time, 2.0% was its target, (and if it went above that it would raise rates) but when it went higher to 3.0%, no action was taken and now it seems to be 4.0% that will force a tightening in monetary policy and an inevitable rate hike that could be as high as 0.5%.

As an aside, fuel shortage was one of the main drivers in September retail spending falling to its lowest level since January. It was only 0.6% higher on the year and much weaker than the 3.0% level recorded a month earlier. There is little doubt that consumer confidence will be hit further, as the fuel and product shortages, combined with colder weather, will leave its footprint in Q4. Carry Me Home Down To Gasoline Alley!