Chief Economist’s Weekly Brief – Silver Linings

Stock markets fell last week, but not all was doom and gloom. Financial clouds can have silver linings too.

Surplus to requirements. Forecasting changes by the OBR’s fiscal anoraks gifted the Chancellor with a £27bn windfall in November, enabling Osborne to perform a fiscal escapology act. Don’t expect a repeat of this on 16th March. Escaping from his self-imposed fiscal strait jacket – the fiscal charter – will prove tricky. The latter, enshrined in legislation, requires a budget surplus every year from 2020 “in normal times”. A feat the UK has only achieved 8 times in the last 60 years. The IFS’s Green Budget warns of red faces with the public finances.  Achieving a surplus will be increasingly difficult in the face of an economic slowdown and ongoing financial market turbulence. Tax receipts are likely to disappoint. Big tax rises or spending cuts, on top of existing plans, could be required at very short notice.  Spending on public services other than health is set to reach its lowest level as a share of GDP since at least 1948/49. With limited scope for more spending cuts, taxation is likely to play the leading role in the austerity drive going forward.

No Jeremiah. UK industrial production, already not fully fit, has taken a turn for the worse. Output shrank by 0.5% between Q3 and Q4 and the sector has avoided recession on a technicality – it managed to grow by a meagre 0.1% in Q3. Manufacturing, which had been improving of late, slipped again. It would be easy to wail at the wider world. But it’s hard to find a relationship between the importance of exports to a sector and its growth. Odd. But something else must be at play.

Under the bonnet. The UK imported £35bn more goods and services than it sold in exports in 2015. But the underlying trends tell a story about the state of the UK and the global economy. First our deficit in goods is now a cool £125bn, while our surplus in services also widened to £90bn. UK export growth to China was 6.5% last year, barely a third of its 18% average growth rate since 2000. But this isn’t just a China issue. Falling sales to the USA wiped 1.6% off export growth.

Kerching! British shoppers haven’t read the memo saying they are supposed to be worried about global economic prospects. Purses and wallets were opened wide in January, with the value of retail sales rising 3.3%y/y in January, the fastest pace since September. Still-falling shop prices meant that the quantity of goods purchased grew 5.1%y/y. So much for the fear that falling prices will encourage people to defer spending because goods will be cheaper tomorrow than today.

Rise and fall. The supply of new houses coming onto the market in Northern Ireland fell for the second time in three months according to the RICS and Ulster Bank Residential Market Survey for January. Meanwhile, new buyer enquiries rose, albeit modestly, for the 47th month in succession. The long and short is that this imbalance between supply and demand continues to put upward pressure on prices. RICS believes house prices in NI will rise 5% this year.

Insolvencies falling at last. Northern Ireland’s recovery has lagged behind the UK on most economic indicators. Personal insolvencies have been no exception. In England & Wales individual insolvencies peaked in 2010 and have fallen every year since.  In Scotland the peak came one year earlier followed by six successive years of decline. Scottish insolvencies fell by almost one-quarter in 2015 and are 62% below the 2009 peak. The total number of insolvencies (bankruptcies, debt relief orders or individual voluntary arrangements) in England & Wales fell 19% last year and are down 40% from the 2010 high. In Northern Ireland, the number of people declared insolvent hit a record high of 3,395 in 2014, 2.5 times the number in 2007. Last year personal insolvencies in Northern Ireland finally recorded their first annual decline in 9 years with a 21% fall. Northern Ireland’s personal insolvency rate, expressed as number of insolvencies per 10,000 adults, has fallen to 19%.  This is in line with the insolvency rate in England & Wales. In 2007 Northern Ireland’s personal insolvency rate was 10 which compared with 25 for England & Wales.

If you build it. 2015 was the year of infrastructure in the UK – at least as the statistics tell it. Output rose 31% compared with 2014. There was also increased building of new houses, factories and warehouses. In the case of housing, this was entirely due to building by the private rather than the public sector. Despite all of this good news, overall construction output is still below where it was in 2007. We are not quite the builders yet.

No regrets. Critics argue that the Fed was wrong to raise rates in December. Janet Yellen disagrees, pointing to rising employment and wages. Overseas is another matter. Yellen is less concerned about slower growth in China than about China’s exchange rate policy and the financial market volatility that causes. When combined with falling commodity prices that volatility could put stress on commodity-producing countries, which would hurt American exporters.

Tighter. Emerging markets are being buffeted by numerous problems, including weak demand from developed markets, lower commodity prices and sharp currency falls. But now global liquidity conditions – the ease of financing in global financial markets – may be beginning to tighten. Dollar borrowing in emerging markets stagnated in Q3 2015, the first time it hasn’t risen in six years. It could lead to tighter financial conditions in emerging markets, and yet another growth headwind.

Confidence up & down. Given January’s slump in global equity markets, deteriorating investor sentiment comes as no surprise. Confidence within the Eurozone fell to its lowest in 14 months in February. Two exceptions: Ireland and France, where business and consumer confidence increased. In Ireland, you have to go back to February 2001 to find a time when consumer morale was higher than it is today.Six Nations fever?

GDP. It measures the monetary value of production in a given place and time. While it works well for coffees and cars, the digital age is proving to be harder to capture. Take music. Global revenues are falling. So according to GDP the world is listening to less music. That’s surely rubbish. We’re probably listening to more music, just via digital channels. As these tend to be cheaper music revenues and their GDP equivalent fall. Good for consumers. Yet in GDP world, money talks.

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