Chief Economist’s Weekly Briefing – Sweet spot


How to stop worrying and learn to love the economy. Beneath the headlines, last week’s data depict a reasonably sunny economic landscape across the Eurozone, the US and, even the UK.

Hope. UK manufacturers are increasingly upbeat. The PMI manufacturing survey rose again in August, to 56.9, up from 55.3 in July, the second highest reading in over three years. As well as current production, new orders and employment were also up. While sterling’s depreciation helped exporters, domestic demand was stronger too. And although input prices continued to rise, we’re talking 5%y/y rather than the 30%y/y suffered at the start of 2017, so inflationary pressures should ease in the coming months.

Building. Local construction firms have experienced a strong first six months of the year. That’s according to the first Construction Employers Federation (CEF)/BDO Northern Ireland Half-Year State of Trade Survey. This is the most positive survey for the sector in recent months.  Private sector housebuilding and infrastructure recorded the strongest rates of growth. Two-thirds of companies operated at full or almost full capacity in H1 2017. Private housebuilding is back to its highest level since 2011. Firms expect to see higher costs and squeezed margins in the year ahead. Key challenges for the sector include: the lack of an Executive; the potential impact of a hard Brexit; and significant skills shortages.

Slowly, slowly. The air is seeping very slowly out of the UK’s consumer credit bubble. Credit card borrowing rose by 8.9%y/y in July, the slowest pace in six months. Other borrowing, such as personal loans and car finance, increased by 10.3%y/y, the slowest growth since late 2015. However, these rates remain unsustainably high. The benign view is that we have rationally used credit to smooth consumption because higher inflation has temporarily squeezed our spending power. In this world, borrowing will slow as income growth returns. Let’s hope that’s correct.

On a spree? UK non-financial firms raised nearly £9bn in external finance in July, the largest amount in any month since 2014. The lion’s share was bank lending (£5.0bn) with bond investors chipping in £3.2bn. Firms already have a healthy cash position, so may be raising funds for a reason. The Bank of England has been expecting that investment would grow to offset weaker consumers’ spending and to capitalise on export opportunities. Maybe it’s happening now.

Comeback. The Eurozone’s major economies have produced some of the most disappointing economic recoveries in recent years. Time and again the green shoots of growth have been trampled by fears of weakness in the sovereign or banking sectors. Is this time different? The GDP numbers certainly suggest so. In Q2, Spain grew at a stonking 0.9%, Germany hit 0.6%, France a solid 0.5% and even Italy managed 0.4%. All were faster than the UK’s meagre 0.3%. While the underlying fears haven’t entirely dissipated, most problems are easier to solve when your economy is already growing.

Results. Faster growth means more jobs and lower unemployment. The Euro Area’s 19 countries had a combined unemployment rate of 9.1% in July. High, but a lot better than the 10% of 12 months ago. No surprise that Germany, the Netherlands and Austria have the lowest rate of joblessness. Ireland deserves a special mention for slashing its rate from 8.1% last year to 6.4% today. For others, the waiting continues. Unemployment rates in France, Italy and Spain are 9.8%, 11.3% and 17.1%, respectively. They desperately need economic growth to continue to help boost employment.

Look who’s back. With many European countries coping with double-digit unemployment, it might seem an odd time to hear chatter about the need for the European Central Bank to tighten monetary policy. It’s happening nonetheless, and inflation rising to 1.5% in August only stokes the conversion’s flames. True, 1.5% is still below the ECB’s 2% target. Exclude fuel prices and “core” inflation is 1.2%. Still, ECB president Mario Draghi will come under increasing pressure to raise his intentions to slow the pace of QE purchases. It’s a signal he’s likely to send in the coming months.

Coming up short. The US jobs figure for August disappointed a little as just 156k jobs were added over the month, less than the 180k expected. July’s 209k was also revised down. Hurricane Harveyed play no role in this according to those gathering the statistics (that may differ next month). It’s still a decent enough figure and although the unemployment rate ticked up from 4.3% to 4.4% it remains historically low. So it won’t throw the Fed off its plan for more rate hikes.

Changed up. US GDP growth in Q2 was revised up from 2.7% to a robust 3% annualised pace, confirming the bounce back from the now almost customary weak Q1. Consumer spending made an outsized contribution. That, too, is customary. But at least business investment also improved and overall, GDP growth averaged 2.1% in H1, bang in line with the post-crisis average. Hurricane Harvey will have damaged economic activity but will also necessitate reconstruction spending. So it’s difficult to tell how it will influence Q3 economic growth.

Upbeat. The US manufacturing ISM index moved to 58.8 in August, the highest reading since early 2011 and the best August figure since 1986. Staffing levels are expanding too with the employment component hitting its highest reading in six years (and that’s people not robots). The upbeat news was tempered by weaker export orders, despite falls in the dollar, and a less rosy reading in the similar PMI survey. But it seems fair to say the sector remains firmly in expansionary mode.

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