Chief Economist’s Weekly Briefing – Over the line?

Manufacturing (2).jpgIt wasn’t blockbuster but UK GDP growth was slightly better than expected last quarter, lending a little support to members of the Bank of England’s Monetary Policy Committee minded to raise rates this week. But will it be enough to get a rate hike over the line?  We’ll find out lunchtime on Thursday.

Slow growth.
The UK economy grew by 0.4% between July and September. That was a little faster than both what forecasters had expected and the increase between April and June. But it still fell short of the long-run average. We’re growing, which is welcome, just not very strongly. Perhaps importantly, the Bank of England had expected output to rise by 0.3%. So, last week’s numbers nudge up the chances that the Bank of England will raise Bank Rate at the Monetary Policy Committee meeting which finishes on Thursday.

Calling it the ‘March of the Makers’ would be pushing things a bit but manufacturing led the way in the UK in Q3 with output up 1%q/q. Services grew by 0.4%. Construction continued its recent contraction, falling 0.7%. There’s a hint in the data of the impact of sterling’s depreciation. It may have helped boost export demand for the likes of textiles, electrical goods and transport equipment. In contrast, the sterling-induced squeeze on incomes from higher inflation might explain the weakness of output growth in a number of leisure sectors that are especially dependent on disposable incomes.

Lost decade. The latest earnings data suggests workers in Northern Ireland are feeling the pinch, and more so than in the UK as a whole. The average full-time Northern Ireland employee saw their annual earnings rise by just 0.1%. After adjusting for CPI inflation, this represented a fall in real term earnings of 2.6%. This is the biggest real-terms fall in earnings since 2010. Indeed, the average full-time employee in Northern Ireland has not seen their wages recover in real terms since 2009. The median annual wage is 5.6% below where it was in 2009 after adjusting for inflation. This represents a loss of £1,550. Unemployment may be approaching a nine-year-low and there may be record levels of employment, but, it is clear that there has been a lost decade for real earnings growth amongst Northern Ireland’s workers.

69.2m in 2026. UK population growth has averaged 0.8% per annum in the past ten years. It doesn’t sound much but it soon adds up, amounting to 4.8m people since 2006 to give a population of 65.6m. For the next decade a slower 0.5% pace is forecast. Cumulatively to 2026 that’s 3.6m people – about the combined size of Liverpool and Glasgow city regoins. Forecasters reckon the contribution from net migration and the natural increase will be roughly equal. And that includes a slowdown in the former. A timely reminder, ahead of the Budget, for more housebuilding and infrastructure.

Uber confident. The flash Eurozone PMIs for October confirmed the Eurozone maintained robust rates of growth into Q4. Private sector firms reported the strongest rise in employment in over a decade. Meanwhile manufacturers are shrugging off a strong euro. The manufacturing PMI hit an 80-month high and the pace of job creation rose at a record rate. Business conditions remain buoyant in both France and Germany. According to the influential IFO survey, German companies are more optimistic than ever before. The world’s third largest exporter is clearly benefiting from the global economic upturn.

Downsizing.  Tightening monetary policy is de rigueur. Last week the European Central Bank announced its first reduction in policy support since 2011. While there will be a nine-month extension to its quantitative easing programme (‘QE’), monthly purchases will be halved to €30bn from January 2018. Significantly, Mario “whatever it takes” Draghi announced no end-date. QE could be extended or increased should conditions worsen. As such, the ECB President said the changes were not “tapering” but a “downsize”. And rates won’t rise until “well past” the end of QE. That looks like 2019 at the earliest.

Weathered. The US economy expanded by 0.7% in Q3, or 3% in annualised terms. It was a little higher than forecast, especially given the hurricanes during the period. If these events harmed the consumer it was shortlived with spending rising 2.4% at an annualised pace and contributing over half of the growth. Resilience in the pace of business investment was also encouraging, aided by increasing capacity constraints and cheap finance. One small concern is that a quarter of growth came from the build-up of stock levels (likely unsustainable). But fair to say US growth remains on a sound footing.

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