Chief Economist’s Weekly Briefing – Pesky

London 2.jpgNot for the first time, it appears inflation is making a bit of nuisance of itself. There was more evidence last week that the consumer is feeling the squeeze and its having a knock-on effect for growth.

Slower, part 1. The UK economy grew by 0.3% in Q1, down from 0.7% in Q4 2016. Weaker growth was caused mainly by a fall of 0.5% in the output of the retail and accommodation services sectors. If there’s such a thing as a good slowdown this was it. Higher inflation is squeezing incomes leaving people with a choice: run down their savings and borrow so as to sustain consumption or tighten their belts. These numbers suggest we’ve done the latter.

Slower, part 2. Growth also slowed in the US. The 0.7% annualised (0.2%q/q) there is calculated differently from in the UK and represents next to no growth at all. However, there’s a lingering suspicion about the quality of the US growth data. We buy more ice cream in summer than winter and spend more on Christmas crackers in December than June. Many economic statistics are adjusted to even out these fluctuations. For several years, reported US growth has been markedly slower in in Q1 compared to others. Is first quarter growth being understated? Perhaps but even if that’s true growth was still slow.

You could be hired. Private sector employment has never been higher, and firms are still adding to their workforces. But the pace of job creation has eased significantly, and a lack of supply is the problem. That’s according to the Northern Ireland Chamber of Commerce & Industry’s latest survey. Around two-thirds of firms are in hiring mode but are struggling to find suitable staff. 75% of manufacturers and 65% of services firms are in this position. Sourcing professional / managerial staff and skilled trades for manufacturers are proving particularly tricky. Brexit could make matters worse. EU nationals have swelled the ranks of our workforce since 2004. With that flow set to ebb it’s time to address skills deficits at home. A new series of apprentices would be a start.

Brexit means Brexit.  The nine months since the referendum result have meant different things to local firms. According to the NI Chamber’s Brexit Watch (Q1 2017) 20% of companies reported a fall in turnover, twice the number that signaled a rise. 12% indicated an increase in exports, with a similar proportion reporting a decrease. Rampant input cost inflation triggered by sterling’s depreciation has been the most notable impact so far. Uncertainty over what Brexit means has resulted in almost 1 in 3 firms scaling back / putting on hold their growth aspirations. Just over 1 in 4 have reduced / deferred their investment and recruitment plans. This is around twice the proportion boosting their growth plans. Other firms (15%) are opting to expand investment outside of NI instead.

Hesitant. “Now-casting”, the ability to gauge the current state of the economy, may be in vogue, but old fashioned methods like consumer confidence surveys are doing a fine job of reading the economic mood music. April’s GfK survey shows that while sentiment remains steady, despite rising price and financial pressures, UK households are starting to feel slightly less sure of the outlook for both the economy as well as their own finances. They are thus more hesitant in their high street spending, something confirmed in the official UK retail sales and GDP figures. Saving is starting to look more attractive, too. And some would say that’s both timely and welcome. 

Gravity. Data from the British Bankers Association shows the demand for mortgages easing in March. The big high-street lenders approved precisely 74,447 mortgages in March, down from 76,426 in February and a bumper 77,759 in March 2016. In many ways this is simply an inevitable response to natural forces, in particular the gravitational force of high house prices and poor affordability. That, and the fact that last year’s numbers were inflated by the rush to beat the rise in stamp duty on second properties. Despite the slowdown in price growth, the price of a typical house reached a record £207,699 in April – over seven times the median wage.

 Rising tide. The richest fifth of UK households had pre-tax income of £84,700 last year, 12 times that of the poorest fifth who received just £7,200. Yet this ratio is actually an improvement on last years 14-fold difference between these groups. The reason for the improvement? More jobs. The amount received in wages and salaries for those in the bottom fifth rose by 20% as more households found work. The flip side to those higher earnings was higher taxes (mainly National Insurance) and lower tax credits. But those same taxes ensure a more even income distribution. After all the taxes and benefits are taken into account the ratio of incomes between the top and bottom quintiles falls to 3.7, the lowest since 1985.

 Deceptive deficit. Last (tax) year the UK’s deficit reached its lowest level since 2007 at a ‘mere’ 2.6% of GDP, suggesting the the job of fiscal austerity is roughly three quarters done (the deficit peaked at 9.9% in 2009). But unfortunately that conclusion is premature. Last year’s tax receipts were boosted by a particularly strong corporation tax take, which would normally be a good thing, but is largely due to companies bringing forward profits ahead of change to dividend taxation introduced in April.  As a result, the OBR expects the deficit to rise to 2.9% of GDP this year. Developments in the deficit have been deceptive.

Hand of history. The European Central Bank left rates and its bond-buying programme unchanged at last week’s meeting. As usual the post-announcement press conference was parsed for hints of upcoming policy changes. President Draghi is a little more enthusiastic about the region’s growth but still sees risks “tilted to the downside” (due to global factors) and inflation pressures that are too weak to contemplate paring back stimulus. He also possibly has the Bank’s history in mind. Six years ago this month the previous President, Jean-Claude Trichet, raised rates as the region was slipping into crisis. The lesson? Monetary tightening in the Eurozone is best done later rather than sooner. 

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