Chief Economist’s Weekly Briefing – Aim high

aim-high-skyscraperPresident Trump has promised to unveil a spectacular reform of the US tax system in the next few weeks to boost the economy. Meanwhile the labour market has been producing spectacular results itself.

Ambitious. The number of Americans in work rose by 227,000 in January and the unemployment rate held steady at 4.8%. During President Obama’s second term employment increased by 12 million (8%), impressive alongside the UK’s still-respectable 3%. President Trump aims to add 25 million jobs over a decade. That’s very ambitious indeed but there are historical precedents: both the Reagan and Clinton administrations saw rates of job growth that, if repeated, would see the target being met. But they both arrived at the White House towards the end of recessions, Trump’s task is harder.

No change, for now. While the US job market continues to tighten and the wider economy grows at a moderate pace, inflation is below target and shows little sign of accelerating. Sub-target inflation meant the Fed’s rate setters kept policy on-hold when they met at the start of the month. They said they’ll pay especially close attention to how price pressures evolve in reaching future decisions on interest rates. Their direction of travel is clear, however: they expect gradual increases in rates from here. For markets, that means two or three 0.25% rises this year.

aim-high-businessWestside Story. We’re used to London and the South East playing the lead role in the UK economy, but in this month’s PMIs it is the more westerly regions topping the bill. The West Midlands, Wales, the North West, and the South West are amongst the front runners in terms of business activity, and their performance in relation to employment is in similarly good tune. Even further west, Northern Ireland and the Republic of Ireland had strong months in January (the latter a stonking 59.3 in terms of output). Meanwhile, Scotland, who beat Ireland in the opening game of rugby’s 6 Nations last week, took the business activity Wooden Spoon. Overall, the UK private sector retains good momentum (a 55.2 reading for output) and maintaining that in the months ahead will be music to many people’s ears.

Supplies, supplies. Northern Ireland has seen a prolonged period since the property crash whenever housing starts have been significantly below levels required to satisfy need. The legacy of the crash is also evident in the number of people who continue to be in negative equity, and are effectively trapped in their homes as a result. So it’s no great surprise that housing supply continues to be an issue in Northern Ireland; something that was highlighted in the latest RICS and Ulster Bank Residential Market Survey.  Buyers will hope spring sees more vendors leap into the market. But we need to see more new builds springing up to. In the meantime, it seems that the rental market is prospering.

Sajid the builder. Measuring 5.7% on the Halifax index, annual UK house price inflation continues to outpace both official inflation (1.6%) and average earnings (2.8%). The cause, as evidenced (if any was needed) by RICS, is lack of supply – both houses for sale and new builds. As the flow of new buyers remains constant, fewer would-be-sellers are taking the plunge. The result is higher prices, fewer sales and falling rates of home ownership. The Government thinks the market is broken, at least that’s the title of its newly published White Paper: “Fixing our broken housing market”. The problem is succinctly stated in the Secretary of State’s opening sentence. “This country doesn’t have enough homes”. Quite. Identifying the problem is the easy part. Fixing it is not. I genuinely wish these measures make a meaningful impact on building more homes in the areas people wish to live. The country needs it.

Hardwired. Some things rarely change. The UK’s trade deficit was £3.3bn in December, taking 2016’s total to £38bn, roughly 2% of national income (up from 1.6% in 2015). The last month the UK ran a trade surplus, “Candle”, Elton John’s tribute to Princess Diana, was number one. Born then and you’d be 19 now and the combined value of the deficit since you were born equals £614bn. That sounds a lot, and it is. Yet Germany’s surplus for 2016 alone was about £220bn. The point is that the UK runs a deficit when sterling is both strong and when it’s weak. In other words, don’t expect the UK’s trade balance to swiftly switch into the black.

Jam tomorrow. Governments and policymakers have spent years worrying about why UK businesses invest so little compared to their peers. A new Bank of England survey sheds some more light on the issue. One third of businesses thought they had invested too little in the past five years. Uncertainty and risk aversion were blamed as being two of strongest obstacles to investment. But getting access to internal funds appeared to be a stumbling block for many as managers juggled competing uses for the cash like paying dividends. Higher investment requires greater patience.

Remember the Greek bailout? The IMF does; every year it writes a report assessing how the “adjustment program” is progressing. Debt sustainability is the key issue. Crudely, will Greece ever be able to pay its loans back? The IMF says no, it can’t. Greece already has debt worth 180% of its GDP and this will explode higher unless the terms of much of that debt are reset or written off entirely. It’s not all bad news. The Government now has a primary fiscal balance, so the taxes it receives finally cover its day-to-day spending, but they don’t cover the interest on its debt mountain. Having seen its economy shrink by a quarter the IMF thinks Greece has done enough to deserve relief. But its European lenders aren’t yet convinced.

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