Chief Economist’s Weekly Briefing – Charm offensive


Prime Minister Theresa May was in the US for talks with President Trump last week. Securing the basis of the UK-US trading relationship is one of the UK’s biggest economic priorities after Brexit. But care is clearly needed after the US’s withdrawal from the TPP, demands to renegotiate NAFTA and threats of 20% tariffs on Mexico.

Boom! The UK economy finished 2016 with a bang, growing at 0.6% in the final quarter. This pace matched the growth seen in Q2 and Q3 and yet again defied expectations of slowdown. Services packed the biggest punch, growing at 0.8%, but manufacturing also had a good quarter expanding by 0.7%. Construction dragged the average down with growth of just 0.1%, reflecting more normal conditions in the sector after big expansions in the last two years.

Best in class. President Trump’s strapline is America First, but the UK’s Q4 performance means it will likely be the fastest growing G7 economy in 2016. This first estimate shows that the UK managed 2% last year whilst Germany managed 1.9% and the US took third place with 1.6%. The rest are trailing a long way behind with France and Canada on 1.3%. And Italy and Japan aren’t even expected to beat 1%. 2017 will be a bigger test for the UK as rising inflation looks set to sap the consumer spending that powered our growth. The tussle between wages and prices will be the big theme this year.

Relocation, Relocation, Relocation? The latest RICS and Ulster Bank Commercial Market Survey pointed to an upturn in occupier demand for commercial property in Northern Ireland during Q4 – evident across retail, office and industrial space. This represented a pick-up following a softening in demand around the time of the EU Referendum. However, Northern Ireland surveyors (31%) were the most likely in the UK after London (32%) to say that they had seen evidence of firms looking to relocate away from the UK in response to the decision to leave the EU. Perhaps not surprising given NI’s land border with the Eurozone – the Republic of Ireland. And the survey suggests that interest in Northern Ireland property by foreign investors continues to fall.

Jam when? Compared with similar nations, the UK endures low productivity and the disparity in economic performance across the country is large (so is the gap between NI and the UK). Its “modern industrial strategy” is the government’s statement of how to solve these problems. The “ten pillars” of the strategy are eminently sensible, ranging from upgrading infrastructure and developing skills to innovation and trade promotion. Success will depend on staying the course. In particular, bridging the productivity gap will take sustained investment in people, ideas and physical assets. And investment means less jam today in exchange for more tomorrow. Are we willing to make that sacrifice?

Tech and debt. A second Government paper this week also explored the UK’s technology and innovation future. Alive to the fact that the fast pace of development in Artificial Intelligence and other technologies could cause substantial change in the consumer and jobs market, the Government has clear aims. These are to identify the areas of comparative strength for UK companies, use the might of government policy and procurement to help bring emerging technologies to market and develop skills, especially for workers displaced by technology. A key area is boosting productivity in the public sector, especially health. Its success matters to us all. Unless we learn to provide health care more efficiently then fairly quickly an ageing population results in Greece-like levels of public debt.

Hard yards. Government borrowing fell by 10% for the 9 month period to December and looks likely that to hit the OBR’s most recent borrowing target of £68bn for the fiscal year. If it does, the deficit as a share of GDP will have fallen to 3%, down from 10% seven years ago, an average pace of consolidation of 1% a year. Based on that performance it’s tempting to say there’s three years left to budget balance, but the Brexit effect delayed that date in the OBR’s last set of forecasts.

What next? The Trans-Pacific Partnership was pretty inconsequential for the US: it was expected to add just 0.2% to GDP over 15 years. So, the costs of withdrawing from it were small. Stopping there would give sceptics of free-ish trade a symbolic victory but do little direct economic damage. Following it with abrogation of the North American Free Trade Agreement or imposing tariffs on China and Mexico would be more serious, risking retaliation and a global trade slowdown.

Possibly, maybe. Hope that the Eurozone economy is on the turn comes courtesy of the area’s January Purchasing Managers’ Index survey. Businesses enjoyed a decent start to 2017, with output remaining near to December’s 12-month high and upcoming work looking particularly strong. But the real game changer could be job creation. Firms reported the largest increase in employment since 2008. It’s just a survey and it’s early days. But could this signal a change in fortune, heralding the one thing the Eurozone needs above all else – namely jobs?

Plaza redux. Last week President Trump identified the stronger dollar as a potential obstacle to a US manufacturing resurgence and more jobs in the sector. There were signs of potential issues in the PMIs. Although domestic orders were strong new export orders for manufacturers were less robust. Is the stronger dollar going to be a persistent problem for this President?  It could be. The indications of looser fiscal policy and tighter monetary policy is a mix that suggests as much. And it was an issue in Reagan’s first term during the 1980s. It eventually resulted in coordinated action amongst the world’s major central banks to depreciate the dollar in 1985 – dubbed the Plaza Accord.  If it was acceptable in the 80s…..?

Six-year-low. NI personal insolvencies hit a 6-year low in 2016 with the number of personal bankruptcies falling below 1,000 for the first time since 2007. The equivalent figure for the corporate sector moved in the opposite direction, with a modest 3% rise, taking company insolvencies to a 4-year high. Corporate & individual insolvencies in England & Wales both posted a 13% y/y rise last year. Personal insolvencies increased for the first time in 6 years but the annual figure still marked the second-lowest level in 11 years. Last year was the first year since 2012 that NI’s personal insolvency rate (expressed as % of adult population) was below that of England & Wales.

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