Chief Economist’s Weekly Brief – Shoulder shrug

Not a lot to write home about in last week’s economic data. In the round, it was fairly soft. But at least the public finances are improving. Perhaps important with a certain ‘national institution’s’ 70th birthday on the way. 


Still weak. The second estimate of GDP confirmed Q1 was still a soft one for the UK economy. And the ONS maintains that the weather played a limited role in the disappointing figure. Yes construction and retail took a hit. But energy supply (heating chilly homes) and online sales (something to do on snow days?) provided a partial offset. Better news was to be found in the steady expansion of the services sector (amidst a longer-term slowing trend) and, due to continuing strength in putting people into work, the compensation of employees grew at its healthiest pace since Q3 2016.

Holding up, but. The UK index of services reading for March confirmed Q1 was an okay one for this sector. Growth of 0.3% across Q1 was in line with the 2017 average. The biggest contributer was the ‘finance and business services’ sector. Drill down a level and the ‘architectural and engineering activities’ was found to have performed well. But like the broader GDP gauge the services sector shows an unmistakable slowing trend in recent years. Over the past three months it has grown by just 1.2% compared to the prior year. Back in early 2015 the pace of growth was three times as fast.

Thawing but careful please. The UK retail sales data was ‘full of the joys of spring’ as the April reading bounced back, rising 1.6% over the month (vs. -1.1% in March). The increase was broad-based with department store sales providing the exception. This itself could be partially attributed to normalization in consumer spending after the weather-related online shopping splurge in March. However, scratching below the surface and the cheer fades. The quantity of goods sold over the last six months remained flat and current growth (1.4%y/y) benchmarks poorly against the five year average (3.3% y/y).

Good start. Amidst disappointing economic growth and ongoing Brexit angst, the Chancellor will be pleased with the strong start to the new tax year for the public finances. Last month the government borrowed £7.8bn – the lowest April figure in a decade and beating official forecasts. Strong income tax receipts boosted government coffers. Osborne’s Soft Drinks Levy, or ‘sugar tax’, also yielded its first revenue. Further revisions shaved £2bn off last year’s borrowing to £40.5bn, almost £5bn better than Mr Hammond assumed back in March. These improvements will trigger talk for sweeteners, giveaways and more spending. But as the Institute for Fiscal Studies regularly reminds us, the reality is more taxing times lie ahead.

Easing. Inflation fell for the third month in a row in April, slipping to a 13-month low of 2.4% y/y. Airfares provided the largest downward contribution. Once again this was due to the timing of Easter. Underlying inflationary pressures continue to wane, with core-CPI falling to 2.1%. With the impact of sterling’s fall now largely washed through, other inflationary pressures, notably the higher oil price, continue to build. Motorists filling up at the forecourts know all about that. But overall the softer inflation figures raises a few fresh doubts about the Bank of England’s eagerness to raise interest rates.

Oil up this summer. While consumer price inflation eased in April, UK factory gate inflation remained unchanged at 2.7% y/y. However, there are signs that inflationary pressures are building. Factories saw the price of raw materials accelerate to a four-month high of 5.3% y/y in April, up from 4.4% y/y in March. Oil is the culprit. Crude oil  jumped by 4.8% in April relative to March and is up a hefty 19.9% over the last twelve months. May’s inflationary figures are expected to show more of the same with a barrel of Brent crude oil recently flirting with $80.

Subdued. UK house prices continue to grow at a slow pace, following the trend that started in mid-2016. In March, house prices grew by 4.2% on the year but fell by 0.2% on the month. London was the only English region where prices were down compared to last year. Brexit is likely playing a role. But a bit of payback after a frothy few years following the financial crisis is to be expected. Private property rental prices showed a similar downward trend and grew by 1%y/y in April, compared to 1.1% in March, dragged down by London rentals which were flat year-on-year.

Still recovering. NI’s house price recovery remains a work in progress. Residential property prices have increased in nineteen of the last twenty quarters. Median prices are up one-third from their Q1 2013 low hitting £130k in Q1 2018. That’s a rise of £32,600 or £543 per month. Good news for those trying to get out of negative equity. The annual rate of growth (+4.2%) remains on a par with the UK though private sector rental inflation is more marked. Last year landlords raised rents 4.4%. Belfast was a hotspot with a 7% annual gain though this was half the rise posted for properties in the Causeway Coast and Glens. Who said the cost of living squeeze was over?

Bridge ‘breaks’. There are further signs that Eurozone economy has paused for breath as the region’s PMI composite index dropped to 54.1 in May, from 55.1 in April. That is an 18 month low. The rate of expansion cooled down amid softer rises in business activity, new orders, employment and backlogs of work. A higher than usual number of public holidays, which workers bridged on to weekends, played a role. Margins were squeezed as input costs rose faster then selling prices. The good news is that the headline survey reading still points to a decent pace of growth for the eurozone.

Leave a Reply