Chief Economist’s Weekly Brief: Oceans apart

Since 2008 the major central banks have been, by and large, pushing in the same direction. No longer. There’s widening clear blue water separating the outlook for interest rates either side of the pond.


Rebound? The UK private sector slowed to a 20-month low in March, accompanied with much harking at the weather and foretelling of April’s strong rebound. Well, the weather improved but the services and construction PMIs underwhelmed. Services activity did rise, to 52.8, but that’s still the second-weakest reading since September 2016 and well below the long-term average. Construction returned to growth in April (52.5), largely driven by a surge in housing activity. But new orders flirted with stagnation. Still, firms are optimistic about the year ahead. Let’s hope this sentiment is not misplaced.

Wrong direction. According to the PMIs, manufacturing was the fastest growing sector amongst the trio of UK surveys last month. Yet it was the only sector not to post faster rates of growth in April. Overall activity slowed to a seventeen-month low of 53.9.  And this despite its poor performance in Q1. Growth in output, employment and order books all eased last month. However, unlike with construction and services, optimism amongst manufacturers is waning. Concerns over Brexit and Trump-induced trade barriers aren’t going to disappear anytime soon.

Sand in the gears. If credit’s the oil that keeps the economic machine running smoothly, the latest Bank of England data show the lubricant’s wearing thin. UK consumer credit growth, running at around 10% for most of the last two years, slowed to 8.4% in March. Auto finance is part of the reason. New car registrations are down 9% so far this year and when around 9 out of 10 new cars are sold on credit that slowdown makes a difference. Credit card borrowing also cooled, to 8.8%, as consumers were less keen to ‘whack it all’ on plastic. Consumers are showing a little more caution.

It’s a slowdown Jim… Growth in the euro area economy eased slightly in the first quarter of 2018, to 0.4% from the sprightly 0.7% enjoyed in the each of the previous three quarters. Still, it’s the sort of slowdown the UK would currently savour as it’s a four-fold increase on our performance. Anyway, a softening pace of expansion is not unexpected or unusual. Overall the region has savoured annual growth above 2% for five quarters on the bounce now.

The Return. Euro area unemployment is what economists’ term ‘structurally’ higher than in most ‘Anglo-Saxon’ economies. So despite a more buoyant economy, the unemployment rate, 8.5% in March, is twice that of the UK (4.2% Dec-Feb). That mustn’t hide the extraordinary improvement in the region’s labour market. In 2013 the unemployment rate was 12.1% with 19 million looking for work. Now 14 million are. Not seemingly enough to stop the return of powerful deflationary forces though. Inflation fell to 1.2%y/y in April, and core inflation could be as low as 0.7%. The runes suggest further delay in policy tightening this side of the Atlantic.

Quietly confident. The US economy has stood relatively strong just as data from the UK and Eurozone has wobbled of late. And so the Federal Reserve chose to strike a quietly confident note in its latest interest rate decision. The rate setters didn’t actually change interest rates, they’d done that at the last meeting back in March when they put the Federal Funds rate up to 1.75%. The focus this time was on their interpretation of what has happened since. A strengthening labour market, buoyant business investment and inflation edging towards the 2% target was enough to warrant “further gradual increases” according to the FOMC. Lets hope renewed high oil prices don’t take too much cash away from consumers.

As I say. The US manufacturing ISM slipped from 61 to 57.2 in April, with some anecdotal reports that the escalation of protectionist threats may be weighing on activity. But the reading is still a strong one. And the similar Markit PMI hit a three-year high. It was a comparable story on the services side. The reading was down, but still in line with the 2017 average and it points to a stronger pace of growth in Q2 compared to Q1. Less positive was the productivity report, which registered a meagre 0.7% annualised figure and keeps trend productivity growth in the US on the disappointing side.

As I do. If US manufacturers are concerned about protectionist measures their rates of hiring belie such an anxiety. Manufacturing payrolls rose 24k in April and have averaged 28k over the past six months – the strongest streak in 20 years. Payrolls as a whole rose 164k during the month, below expectations but better than the 135k in March. The unemployment rate hit a new low of 3.9% (from 4.1%), the lowest since December 2000. Wage growth was unchanged at a muted 2.6%y/y. But that isn’t something that will dissuade the Fed. Other wage indices point to building pressures, albeit gently.

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