Chief Economist’s Weekly Brief – Headwinds

Graphic re the sectors in the latest Ulster Bank NI PMI

Markets expect the first rise in Bank Rate in December 2018. And judging from the Inflation Report, the Monetary Policy Committee (MPC) members seem at ease with this. Their reason? Global economic headwinds that are blowing harder than before.

Everyone else’s fault.  Mark Carney characterised the UK’s economic outlook as continued solid expansion at home in the face of headwinds coming from overseas. Those headwinds include a deterioration in global financial conditions (see falling equities and corporate bonds), slower than expected growth in the US and of course increasing concern about China. It’s a similar story on inflation too. The MPC thinks the overarching reasons for inflation being just 0.2% are all international. Low oil prices, low food prices and sterling’s appreciation since 2013. Such a difference in conditions between the domestic economy and the outside world begs the question: how long the UK can continue to outperform its peers?

Car sales go into reverse. Northern Ireland new car sales figures appear to be somewhat at odds with consumer sentiment, which has been buoyed up by falling fuel and energy prices, with rising disposable incomes. In terms of the latest car sales figures, Northern Ireland has started the year in reverse. While the UK as a whole saw sales up around 3% – buoyed by strong growth in England – the number of cars driving out of showrooms in Northern Ireland fell by 2.6% in January, according to the Society of Motor Manufacturers and Traders.

PMI starts year on a high. The latest NI PMI pointed to faster rates of growth for output, new orders and employment in the Northern Ireland private sector, with activity increasing at the sharpest pace since September 2014. At an industry level, the services sector was the star performer in January.  Service sector activity expanded at its fastest rate in fourteen months and at a faster rate than for the UK as a whole. The retail sector has rebounded from a disappointing fourth quarter with sales, orders and employment all on the rise. Indeed, retailers reported the fastest rate of employment growth of all sectors.  Outside of services, construction firms continued to report rises in output and orders though at weaker rates than in December. Manufacturing remains the key area of concern. Local firms reported a modest rise in output in January but new orders slumped. Manufacturing orders have been flat or falling in four of the last five months.  January’s decline represented the sharpest fall since September 2012. In light of this, it is not surprising that manufacturing reported job losses for the fifth month in a row. 

Splendid isolation. For now at least, UK business sentiment seems largely impervious to the wider world’s woes. The Purchasing Managers’ Index for services, at 55.6, is close the average for the second half of last year, suggesting the sector’s expanding by around 2.5%-3% annually. Even the manufacturing index saw a modest improvement, rising to 52.9 in January, up from 52.1 in December. Only construction firms voiced clear concerns. But should the global economy continue to slow then, like all good things, the relative buoyancy of our service sector must surely come to an end.

IOU. There were 71k approvals for house purchase in December, the most in a month since February 2014. And it’s not just mortgages that are walking out the door. And consumer credit is still growing at quite a clip, 6.2%y/y for credit cards and 10%y/y for personal loans and overdrafts. What the Bank of England will continue to look at is the groups of households for which debt is particularly high. They remain a minority, but still an important one.

Something for everybody. There was material for both optimists and pessimists in the US job market data. The good news: unemployment fell below 5% in January and wage growth accelerated to 2.5%y/y. Not so good news: employment growth slowed with a net 151,000 jobs created. In the last quarter of 2015 the monthly rise had averaged 280,000.

Weaker. The US non-manufacturing Purchasing Managers’ Index showed the service sector continued to grow in January. However, the reading slipped by 2.3 points to 53.5. Forward-looking indicators such as the flow of new orders say growth will weaken further. The manufacturing sector continues to labour under the pressures of a strong dollar and weak demand from the energy sector for capital goods. It’s difficult to see the Fed adding to its December rate hike any time soon.

And weaker again. As the song goes “New York, New York so good they named it twice”. The US has two sets of PMIs, the ISM and Markit varieties. The ISM also says that the health of the US economy is not so good. The manufacturing index started 2016 with its fourth successive month of contraction, a feat last achieved in July 2009. The non-manufacturing index (mostly services) signalled an unexpected slowdown in January, with the rate of growth easing to a 23-month low.

Doldrums. China’s PMIs continue to suggest the country’s manufacturers are struggling while the services sector is experiencing modest growth. The manufacturing reading remained below 50 at 48.4 with new export orders falling to its weakest level in five months. The services PMI has been hovering just above 51 in recent months, well below the long-term average of 54. It’s been a tough start to the year for China’s financial markets and for its economy, too.

Fiscal support. Many emerging markets are having a difficult time of it. For some, significant pain is being felt. Both Russia and Brazil, big commodity producers, are in recession. But while many of China’s neighbours are experiencing a slowdown, GDP growth is being assisted by government spending. Indonesia and the Philippines posted growth figures of 5% and 6.3%y/y respectively in Q4. Thailand grew by 2.9% y/y in Q3 last year. And South Korea, almost as regular as clockwork, posted a very respectable 3%y/y growth in Q4. The question is how long these growth rates can be sustained?

Snail’s pace. The unemployment rate in the Euro Area fell to 10.4% in December, the lowest since late 2011. Since it peaked in mid-2013, the rate of joblessness has fallen by 1.7 percentage points. By contrast in the US and the UK it is down by more than 2.5 percentage points. And while Germany is sitting pretty on an unemployment rate of 4.5%, spare a thought for France, Italy and Spain, where unemployment is still above 10% and in the case of Spain, above 20%.

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