Chief Economist’s Weekly Briefing – America first


Markets are betting the US Fed will raise rates next week but strong jobs and confidence data are somewhat at odds with growth that is far from spectacular.

Lack of diversity. US growth was less diverse in terms of its contributors than previously thought in Q4 2016. Like the UK, growth is heavily reliant on consumer spending. To all intents and purposes it was the sole driver of headline growth, contributing over 2 percentage points to the 1.9% figure. The rest of the gang – trade, investment and government spending – subtracted 0.18 percentage points. It meant US growth in 2016 was just 1.6%, the weakest since 2011. Meanwhile the broad-based measure of inflation in the GDP figures fell. Take note all you Fed officials eager to raise rates!

Disconnect. In August the US manufacturing ISM stood at a somewhat depressed 49.4. It has risen every month since then to a sturdy 57.7. It’s only been higher on one occasion in the past five years. The upbeat sentiment was spread across the board with 17 of the 18 industries pointing to growth. But while the sentiment gauge has surged the hard data has yet to follow. Industrial production grew by just 0.4% at an annualised rate in Q4 while a measure of capacity utilisation has hardly budged over the past year. In some respects the rhetoric around the US economy is showing a bit of a disconnect with reality.

Slowdown. The UK economy entered 2017 on a firm footing. But the early indications are that there has been a notable loss of momentum in the first quarter. This is evident within February’s PMIs, particularly within the economy’s largest sector – services. The latter saw activity slow unexpectedly to a 5-month low with input costs rising at their fastest rate since August 2008. The pace of manufacturing activity also eased in February but significant momentum remains, not least from buoyant demand from export markets. Construction saw a marginal improvement in activity last month but the rate of expansion remains moderate by historical standards. Inflation remains a major headwind for all sectors and UK growth in the year ahead.

Lending a hand. “Neither a borrower nor lender be”. So the famous words from Shakespeare’s Hamlet go. But if this is good advice, it has traditionally fallen on deaf ears in the UK. Consumer spending, driven by borrowing, powers the UK economy. Indeed, lending to individuals continued to rise at 4% y/y in January, and new mortgage approvals hit their highest level since February last year. But the period of double-digit growth in unsecured credit may be coming to an end. The annualised growth rate in consumer credit eased to 9.6% in the three-months to January, down from 10.2% in December. Credit card lending growth has slipped from 10% y/y in November to 6.9% in January. It’s not all going one way though. Other credit (e.g. car finance & overdrafts) is still expanding at a rapid 11% y/y. Borrowers we continue to be.

Steady progress. Eurozone unemployment is high. So we should welcome the news that it’s fallen from 11.3% two years ago to 9.6% in January. Croatia, Spain and Ireland deserve special mention. Between Jan 2015 and Jan 2017, Croatia’s unemployment rate fell from 17.5% to 11.3%, Spain’s from 23.4% to 18.2% and Ireland’s from 10.2% to 6.7%. Ireland probably picks the prize as the yards get harder the lower your unemployment rate. The results are encouraging across most Eurozone nations. That’s great. But the march downwards continues.

Mounting pressure. Consumer prices rose by 2% across the Eurozone in the year to February. Compare that with a year ago, when prices across the EZ fell by 0.2%y/y. Just as energy prices were pulling prices lower then, so they are lifting them now – rising by 9.2%y/y.  We have to wait for the national details, but one to watch is Germany. Historically concerned about inflation and currently sceptical of monetary policy, German inflation is likely to be above the EU-wide target of less than 2%. Expect louder calls from some quarters for the European Central Bank to ‘review’ its ultra-loose stance.

Renewed confidence. Business sentiment in Europe has rarely been better, despite all the political drama of election season. The Eurozone composite PMI reached 56 in February, the highest in almost 7 years. Ireland, Spain and Germany were among the most optimistic economies, backing up recent strong growth seen in all three countries. Notably France also performed well with a score of 55.9. The French recovery has delivered GDP growth 3% lower than Germany’s expansion over the last 5 years and nervousness amongst investors has seen its bond yields rise this year, whilst Germany’s have fallen. A late spurt of growth would do a great deal of good. 

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