Chief Economist’s Weekly Brief – Present tense

The UK economy grew by a sprightly 0.6% in Q2. But with everything viewed through a pre/post-vote prism this counts as old news. Yet not every change will be due to ‘Brexit’, with signs the economy was cooling even in May.   

Spring surge. The UK economy grew by 0.6% in Q2 meaning our GDP is now 2.2% higher than a year ago. This decent pace is partly explained by British industry expanding by 2.1%, a welcome change given the sector’s output fell in the previous two quarters. Output in the dominant service sector rose by 0.5%, a shade below Q1’s 0.6% but solid growth nonetheless. Despite saying little about Brexit, these figures do reveal the UK’s persistent productivity challenge. Over the last year the number of hours worked has risen by 2.0%. The net result is virtually no productivity growth, again.

Pink. It’s a quaint tradition that Britain’s statisticians name publications after their covers’ colours. The Pink Book deals with the balance of payments. The latest edition confirms the record current account deficit of 5.4% of GDP in 2015, the largest in the G7. Importantly, it explains that the recent rise in the deficit is down to UK earnings on overseas investments falling relative to what foreigners earn here. It’s not been caused by poorer trade performance.

Blue. The Blue Book is the national accounts. It contains an analysis of growth in Europe’s main economies since 2009. The UK and Germany lead the pack, both having grown by 12% in the six years to 2015. The composition of growth might surprise. Contrary to stereotypes, investment accounted for more than half of UK growth but less than a quarter in Germany. Spare a thought for Italy, whose national income is 2% lower than in 2009. Helps explain current worries about their banks.

Poor views. The first ‘established’ data release for July (i.e. post-vote) fails to provide clarity. According to the Nationwide, UK house prices, a decent bell-weather of consumer sentiment, rose by 0.5% in July, compared with 0.2% in June, nudging the annual rate of inflation up to 5.2%. Seems clear enough but the murkiness arises because there’s a delay between agreeing a price and securing a mortgage. In other words, July’s data contains information on June’s pre-vote agreements. The long short is we’re still a little while away from having a clear, data-driven, view of the post-vote economic landscape.

Giving credit. Borrowing by firms and individuals grew at their fastest rates in more than two years in June. Loans to businesses were 0.6% higher m/m. Loans to individuals rose by 0.9%, led by strong growth in personal loans and credit cards. Mortgage lending grew more slowly, by 0.3%. The number of new mortgage approvals slipped to 65,000, the lowest level in more than a year. A continuing adjustment to recent stamp duty changes or a sign of something else?

Painful. Eurozone inflation edged up from 0.8% to 0.9% y/y in July. But it will provide scant comfort for the European Central Bank. To help lift inflation back to target it will, at the least, extend its quantitative easing programme past the current end date of March 2017. It doesn’t help that the decline in unemployment is painfully slow. In fact no progress was made during June – it remained stuck at 10.1%, more than twice the UK figure. This time last year it was 11%.

Familiar. And to top it off Eurozone growth slowed in Q2 with an expansion of just 0.3% after a 0.6% rise in Q1. It’s a familiar story. The Eurozone economy started 2015 on a high before reverting to its default sluggish growth path. France’s stop-start economy remains a big issue. There was no growth to report in Q2 after a 0.7% rise in Q1. Spain at least managed another stellar performance, rising 0.7%.

Nudge. The Fed has been back and forth this year, moving from apprehension over the economic outlook to confidence and then back again. Last week it was in an optimistic mood, stating that near-term risks to the US economy had diminished and the labour market had got a bit of its mojo back. They seemed to be nudging markets into recognising that rate hikes may be sooner than they expected. Even if rate hikes do resume this year, they’ll be at a very gentle pace.

What lies beneath? The headline reading of US GDP disappointed with annualised growth of just 1.2%, half the anticipated figure and little different from Q1’s 1.1% outturn. But underneath things were not so downbeat. Consumer spending rose a punchy 4.2% annualised, the highest since Q4 2014. Investment was weak but the big drag came from firms running down inventories. It’s uncertain which of the two pictures the Fed will weigh more: the weak headline or the better news underneath?

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