Chief Economist’s Weekly Briefing – Gently does it

pound-414418_1280 (3).jpgDebt looms large not just in the UK but across major economies. So rate hikes have to proceed very gently.

The producers. A decent August for UK production as output rose by 0.2% on the month. If it manages the same in September then production should rise by 0.9% in Q3, about treble its recent pace. Manufacturing is enjoying a mini-renaissance. Output rose 0.4% on the month and turnover is up 6% on the year. It’s an equal opportunity buoyancy too, benefiting common-or garden manufacturers as well as the high-end techie stuff. What’s not to like?

Eerily familiar. UK trade continues to play a familiar tune. Yes exports rose, up £314m in the month to August. It’s just imports rose by more. Three times more in fact, by £1,039m. The total trade deficit in the three months to August is double that of the period leading up to May. So while production, and maybe even the moribund construction industry, should add to GDP growth in Q3, trade is likely to lower it. Important when the over-relied upon services sector appears to be snoozing.

Party poopers. The International Monetary Fund believes the world economy will grow a shade faster in 2018, at 3.7%, than it had previously thought. Absent from the growth upgrade party is the UK for which the IMF has held its forecast for 2018 at 1.5%, placing us just below mid-table among the ‘G7’. It describes the medium-term outlook for the UK as, “highly uncertain,” depending on the new economic relationship with the EU and the extent of any barriers to trade, migration and cross-border financial flows.

Predictable. Faster growth is one reason the IMF reckons the global financial system has become more stable. However, they don’t get paid to be content but to worry. They point out that indebtedness outside the financial sector is higher now than in 2007 across the ‘G20’ countries. That makes much of the world’s economy vulnerable to unexpectedly large or sudden changes in interest rates. The job for central banks, therefore, is slowly to nudge interest rates higher and to start unwinding quantitative easing, with “no surprises” being their motto.

Promise, warning and a Party Congress. China will retain its prominent role in driving the global economy with GDP growth forecast to slow modestly from 6.7% last year to 6% in 2021, according to the IMF. But the rosy outlook is caveated with the customary warning of the need to rein in credit expansion and galvanise the reform process. Some pointers on the direction of travel in this area may emerge at this week’s quinquennial gathering of China’s Communist Party (the 19th Party Congress). Just as important will be whether President Xi identifies a successor when his term is due to end in 2022.

Take note. Tucked away in most IMF outlooks is a gentle reminder to policy-makers in advanced economies to think about investing in more physical infrastructure. The Fund reckons an increase in public investment of 1% of GDP can raise the level of output by 1½% over the medium term. It pays for itself, in other words. Unfortunately three decades of decline have left public investment in infrastructure near historic lows. A timely reminder for any Chancellors with Budgets on the horizon.

Buoyant. For many years Northern Ireland’s housing market was the ‘sick man’ of the UK. Now, the outlook is more positive than elsewhere. Local surveyors expect prices and sales activity to rise over the next three months. That’s according to the latest RICS (Royal Institution of Chartered Surveyors) and Ulster Bank Residential Market Survey. Local surveyors remain more optimistic about price rises and sales activity than their counterparts in all other UK regions. London remains the capital of gloom for surveyors with both prices and activity falling.

London calling… for help? Anyone want to buy a house? The capital’s housing market has gone distinctly flat and surveyors expect it to get worse. A net balance of 48% of surveyors expect prices to fall over the next 12 months, a level of pessimism only matched in the immediate aftermath of the EU referendum and back in 2009. Falling prices will be welcomed by plenty, namely those wanting to get on to the housing ladder. Renters too appear to be benefitting as landlords are more nervous about losing their income and rental growth is slowing.

£/sqft. But it will take more than the current slowdown to change the fact that London housing is extraordinarily expensive.  Or more accurately, the land on which they’re built is expensive. London’s houses are normally reckoned to be 50% more expensive than the next most pricey region, the South East. But measuring cost per square foot shows it to be virtually double. 10 years ago the cash for a typical London house would have got you one three times bigger in the cheapest region, the North East. Today it will get you one five times bigger. Worth noting for anyone with a large or growing family.

Trading up. The overall value of UK trade in goods exports rose by 15% in the year to June 2017. This was a shade above the 14% increase in imports. The corresponding figures for Northern Ireland were +12% and +10% for exports and imports respectively. NI exports to the Republic of Ireland increased by 14% – ten times the corresponding rise in imports. An encouraging rise no doubt boosted by sterling’s weakness. After Great Britain, the Republic of Ireland and the US remain Northern Ireland’s two largest trading partners. NI food exports and pharmaceuticals recorded strong year-on-year gains of 19% and 13% respectively.

All rise. All 12 UK regions reported an increase in business activity in September. That’s according to the latest IHS Markit PMIs. The North East (51.9) returned to growth (above 50) for the first time in three months. But still trails behind the other regions and was the only region to report job losses in September. The Welsh football team failed to qualify for the World Cup playoffs / finals. It might be scant solace but the region topped the growth league last month, closely followed by Yorkshire & Humberside (55.9). The latter retains the most optimistic outlook for the seventh month running.

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