Chief Economist’s Weekly Brief – Lowdown

Last week was mostly about lows. First, the IMF downgraded its forecasts for the UK economy this year. Second, the Bank of England’s inaction is adding support to a “lower for longer” expectation for UK interest rates. And third, the US economy’s retail sector growth hit its third lowest number since 2008. Leave it to China then to hit a high – largest single quarter credit boost to the economy in its history. That high may yet be followed by a low…

Gloomy. The IMF’s World Economic Outlook is its twice-yearly assessment of the global economy. And its most recent report did not make for cheery reading. Yes, the UK is expected to be the second fastest growing G7 economy this year, but that’s after yet another fall in the forecast. The IMF now expects the UK to grow at 1.9% this year, down from the 2.2% pace it expected in November. And since misery loves company, we’re not alone. All major advanced economies saw their outlooks revised down, while world growth is now expected to be 3.2% this year, very weak by historical standards.

Low expectations. That the Bank of England voted unanimously to keep Bank Rate at 0.5% last week is not the story. Rather, the news was that a decision affecting the price of borrowing and savings for millions of British firms and households occurred largely unnoticed. This reflects how deeply engrained the expectation that low rates are here for some time has become. And as the minutes of the meeting revealed, the Monetary Policy Committee is in no rush to move.

Pedestrian. The NI economy expanded by 0.4% q/q in Q4 2015 according to NI Composite Economic Index (NICEI); a rather pedestrian rate of growth compared with the UK as a whole (0.6% q/q). And while 2015 represented the strongest rate of economic growth for the NI economy and its private sector in 9 years, 2015’s private sector rate of growth was still less than half that of 2006. The NI private sector has still only recouped 37% of the output it has lost during the recession.  If it were assumed that the Q4 2015 growth rate was repeated each year, private sector output would not return to its pre-downturn peak until the start of 2019.

Low for how much longer? Last month UK CPI hit a 15-month high of 0.5% y/y. Inflation has been below the MPC’s 2% target for 27 months in a row, last seen north of 2% in December 2013. Consumers have enjoyed something of a ‘sweet spot’ with energy, food and fuel prices all falling last year.  Food and energy bills are still dropping but the price at the pump have started rising again. Petrol and diesel prices are currently up 4% and 5% respectively since the start of the year.

No country for young men. UK average house prices rose 7.6%y/y in February, with the South East seeing the biggest surge and Scotland the only place where prices fell. However, London will be the place to watch over the next 6 months, as the latest RICS survey is pointing to a big slowdown largely due to the new Stamp Duty regime. But UK housing remains expensive. And ownership is increasingly rare among younger people. Recent evidence presented by the ONS shows that in 1980, 20% of 21-25 year olds rented, a proportion that had risen to 60% by 2014.

Building support. UK construction output grew 1.5%q/q in February led by house building, which grew a whopping 6.8%q/q. This will come as good news for the UK economy, given that the PMI surveys were saying that house building has been struggling. Unless we get some big revisions (always possible with these data), it would take a fall of at least 2%m/m in March to mean that construction output contracted in Q1 and hence was a drag on UK economic growth.

Uneven. The UK’s PMI index stands at 53.6 for March, but the regional variation around that level of confidence is substantial. Right at the top, Northern Ireland recorded a score of 56.4, a massive turnaround from recent years, doubtless helped by the supercharged growth occurring in the Republic of Ireland right now. The South East and London both beat the average and both improved in March. But momentum isn’t as kind at the other end of the table. The North East joined Scotland by indicating contraction in March. In the North East’s case a score of 49.5 is only marginally different from the “no change” value of 50. Whereas Scotland’s 48.5 suggests further weakening outside the oil & gas industry.

Subdued. The US labour market may still be firing but the US consumer has had a subdued start to the year. Retail sales were down 0.5% on an annualised basis in Q1 after a 1.2% rise in Q4 2015. That’s the third weakest performance since the crisis-induced recession. And inflation remains subdued, too. Core prices rose 0.1% between February and March – the weakest rise since August last year. On a y/y basis prices rose 2.2%, down from 2.3%, higher than the UK and Eurozone but nothing to get worried about. The Fed needs to look elsewhere for reasons to raise rates. 

On the money. As ever China’s GDP figure came in on the money, rising 6.7%y/, bang in line with market expectations and right in the middle of the government’s 6.5 – 7% target for the year. Despite official growth being lower than 6.7% the economy genuinely appears to have ticked-up a little in Q1. Industrial production and fixed investment both recorded their fastest rates of growth since the summer. But then, the economy is very much hooked on money. New financing into the economy in Q1 was the strongest in history. China is responding to a credit boom by initiating yet another credit boom.

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