Chief Economist’s Weekly Brief – The only way is up (maybe)

One pound coin on fluctuating graph. Rate of the pound sterling (shallow DOF)
One pound coin on fluctuating graph. Rate of the pound sterling (shallow DOF)

As the world watches and waits for the outcome of the US election there are signs of modest improvements in performance across the major economies. The Bank of England marked up its 2017 growth forecast. The US continues to create jobs apace. Even the eurozone gives some cause for optimism. What could possibly go wrong? 

Upgrade. The Bank of England now reckons that the UK will grow by 1.4% in 2017. That’s much faster than the 0.8% forecast it made in August. The reason? Economic performance has been much more resilient in the face of the referendum outcome than the Bank had thought likely. With growth stronger than expected, another Bank Rate cut this year, which the Bank had previously signalled was likely, is now very much off the table. However, the improved forecast is nothing to write home about. Since 1948, the economy has grown by 1.4% or less in only one year in five.

Good start. The final quarter of the year got off to a good start according to the October Purchasing Managers’ Index (PMI). The services reading strengthened again with output and new orders hitting nine-month highs. Construction activity remains sluggish with growth confined to house builders. Manufacturers remain buoyed by a favourable exchange rate. Sterling job!  Like the Bank of England the PMIs point to rising inflationary pressures. The manufacturing input cost index is at its highest level in over five years. Some of that will eventually be passed on to consumers.

Resilient. There were just shy of 63k UK mortgage approvals in September, down 10%y/y. And for Q3 as a whole, approvals fell 6%y/y. But it’s not as bad as the headline figures appear. Generally speaking UK lending data have been relatively resilient since the referendum. Gross mortgage lending was 4%higher in Q3 compared to last year.And mortgage approvals were better than the Bank of England was expecting back in August.Just one of the reasons for the BoE’s growth upgrade.

Not yet. The Fed kept interest rates on hold last week. While acknowledging that the case for a hike had continued to strengthen it wants to see more evidence that prices are rising sustainably towards the 2% target before moving. That’s a pretty high bar at the moment as expectations of future inflation remain low. Nevertheless, markets reckon there’s roughly a 75% chance that rates will rise next month, at the Fed’s first post-election meeting.

Another hurdle cleared. The US economy added 161k jobs in October, not spectacular, but a solid performance. The prior two months were revised up by a combined 44k, too. More eye-catching was the wage data. Pay growth of 2.8% is the best the US has managed since mid-2009. Unemployment is now half what it was back then but wage growth of below 3% underlines just how weak inflationary pressures are. The Fed will see this jobs report as another test passed, but it also highlights how little urgency there is over the need to raise interest rates.

Insufficient. Eurozone GDP grew by 0.3% in Q3 from Q2, the same pace as the previous quarter and close to the average pace of the last seven years. But sometimes average isn’t good enough. Output was up just 1.6%y/y, insufficient to make big inroads to the eurozone’s 16 million unemployed, a rate of 10.1%. The French economy grew a mere 0.2% from Q2. If it carries on like that then France’s unemployment rate of 10.5% will be going up rather than down.

Autumn optimism. France also underperformed in October’s PMI readings. It was the only one of the major four economies to record a fall in its composite PMI reading. The other three – Germany, Spain and Italy – all rose. The European Central Bank will be encouraged by incipient signs of inflation. Other surveys also point to a good start to Q4 for the eurozone. Hopefully the ‘soft’ data of the surveys can translate into improved ‘hard’ data, like GDP and jobs.

China’s PMIs. The latest PMIs point to continued steady growth in China. The manufacturing gauge reached a two year high with new orders rising sharply. The services sector continued its general trend of steady rises seen in 2016. With growth looking decent for now the government is turning its attention to bubbling financial system risks….

Shift? …announcing last week that restraining asset bubbles and controlling financial risks are now priorities for the country’s central bank. If followed through it’s a bold move, long overdue. But it won’t be easy. China’s corporates, particularly state-owned, have become used to ample and easy loan availability. And a lot of household wealth is tied up in real estate. There’s no shortage of places to start. Among the world’s largest cities, six of the top ten in terms of house price growth over the past year are in China. In Shenzhen prices rose almost 50%y/y.

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