Chief Economist’s Weekly Brief On the up

Economic news from the Eurozone and US was generally very good last week.  Bond yields are pushing higher as a result.  That’s good news for people worrying about the possibility of more years of slow growth and low interest rates, sometimes called secular stagnation. It’s also a relief to the many firms grappling with big pension deficits. 


Cantering. The euro area’s economy continued to canter along nicely in Q4 2017, growing by 0.6% q/q, ahead by a nose of the UK’s 0.5%. But consistency and speed both count and the region’s 2.5% increase in 2017 outpaces the UK’s 1.8% without breaking sweat. There was some catching up needed. The region’s economy is now 6% larger than its pre-recession 2008 peak, behind the UK’s 11%. Both share a manufacturing renaissance though, as the euro area’s manufacturing PMI remained close to its record high at 59.6 in January.

Not there. Like Macavity or the Pimpernel, inflation remains elusive in the euro area. The ‘flash’ measure for January suggests annual inflation fell to 1.3%, a smidgen below December’s 1.4%. The fall occurred despite continued improvement in the job market. Yes, the unemployment rate remained at 8.7% in December but it’s been falling around one percentage point a year since its 12.1% peak in 2013. Without firm evidence that the region’s jobs and output rally is forcing inflationary pressures, the ECB will be reluctant to tighten the taps.

Makers of the world unite. US factories are fired up, too. The US ISM registered a reading of 59.1 last month, little changed from December. Judging by the survey the manufacturing sector strengthened over the course of 2017 and is currently enjoying its best time in 13 years. The recent weakening of the dollar, making exports more competitive, will likely provide even more support. The less good news came from the productivity statistics which showed a slight decline in Q4 2017 as hours worked outpaced the rise in output. It meant for 2017 as a whole productivity rose a paltry 1.1%.

Ignition. Has wage growth finally arrived in the US? After moving sideways between 2 and 2.5% for the past two years wage growth reached 2.9%y/y in January, its strongest since way back in 2009. The rest of the monthly jobs report was none too shabby. 200k jobs were created last month while unemployment held at a very low 4.1%. The wage growth figure raises the prospect of more than the forecast three interest rate hikes from the Fed in 2018. And it gave extra impetus to the recent bond sell-off with the yield on the US ten year government bond reaching 2.8%, its highest since early 2014.

Manufacturing inflation. As far as manufacturing activity is concerned, the UK started 2018 with a similar rate of growth as January last year. Granted the PMI reading of 55.3 is down a bit on December which itself was below November’s 51-month high. But the good news is that the pace of job creation and export orders growth quickened.  The bad news is inflationary pressures are significantly above their long-term averages, too. Rising raw material prices helped propel input cost inflation to an 11-month high. Manufacturers are raising the prices of their goods. Let’s hope the rising prices and slower growth trend doesn’t gather too much momentum.

Services delivering. We often hear our economy is dominated by services. Trade is no different. 2016 proved to be a record year for services exports and imports. The UK pulls in just half the amount of services it exports. That equates to a healthy trade surplus. UK international trade in services exports (excluding travel, transport & banking) increased by 16% y/y to £142bn – ten times the size of manufacturing exports.  Management consultancy, telecommunications and computer services all posted strong growth. But financial services (+24% y/y) is the star player accounting for 1 in 8 of all services exports. Hence the UK’s desire for financial services to be in a post-Brexit trade deal with the EU. Watch this space.

Tripping away. Northern Ireland’s tourism industry continues to go from strength to strength. The number of overnight trips in the year to September 2017 rose by 11% y/y. Over 90% of this increase was due to holiday-makers. Meanwhile one-quarter of the rise in overnight trips was due to the Republic of Ireland market which has increased by one third in a year. The fastest growing market is those holiday-makers from outside the UK and Republic of Ireland (+59%). Comforting news for hoteliers when you consider Belfast is creating more new hotels rooms this year than any city in the UK or Dublin.

Contrasting. Construction activity in Belfast forges ahead, according to Deloitte’s latest Crane Survey, with 25 schemes currently under construction in the city, 22 landmark developments due for completion this year, and over 1,000 new hotel rooms to be finished in eight Belfast hotels in 2018. So building here is booming? Not quite according to the latest RICS and Tughans NI Construction Market Survey. Indeed, it points to sluggish growth in the fourth quarter of 2017 and lower expectations for this year than in other parts of the UK. The difference is that the RICS survey covers Northern Ireland as a whole whilst Deloitte’s report only looks at Belfast. This perhaps suggests something of a contrast between the capital and other areas.

Tick, tock. Consumer credit growth edged up in December, rising by 9.5%y/y. Growth in both UK credit card lending (+8.9%) and the likes of personal loans and car finance (+9.8%) increased. For much of last year households borrowed – and reduced the amount they saved – to finance consumption in the face of the squeeze on spending power. A recent Bank of England survey suggested that the supply of credit will contract in Q1 2018. If that happens some consumers will have to draw in their horns and businesses relying on disposable income growth and credit-financed purchases will notice.

Not moving. It was a different story in the UK housing market. Not surprisingly, the number of re-mortgaging approvals fell sharply, by 14%m/m as home owners struck new deals in the expectation of a Bank Rate rise in November. But the number of mortgages approved for house purchase also fell, by 2%m/m. Perhaps these borrowers also tied up their loans before the rate rise. If so, there’s little to see here. However, if this signals a slowdown in house buying it will be worth watching

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