Chief Economist’s Weekly Brief – Full Time

Big, expensive, marred by controversy and inherently political. No, not the World Cup. QE. And the final whistle for this extraordinary period for monetary policy is approaching. At least for this round. And there’s always the chance of extra time.


Widespread Weakness. Concerns are rising about the performance of the UK economy in Q2. It certainly hasn’t been an auspicious start. The trade deficit widened (again) in the three months to April by £1.9bn, to £9.7bn. Exports to the EU fell by £1.3bn, while imports stayed relatively flat.  Overall, our services surplus narrowed and export deficit widened. Sluggish exports have shaken the manufacturing sector. Output fell by 1.4% in April, the largest month on month fall since 2012.

Mainly Red. UK construction output saw its sixth consecutive decline in April, falling by 3.4%. That’s the sharpest fall since 2012. Almost all sectors are in the red. Construction firms cited reasons aplenty, including the rising costs for fuel and, of course, the shadow of uncertainty over future rights of EU workers (who make up more than 8% of the construction workers) in a post-Brexit immigration system. Yet amidst this, new orders for private housing rose, always a reason to smile.

Still running. The UK added c.150k workers and unemployment dropped by c.40k during Feb to April, compared to the previous three months. Lest we forget, the unchanged unemployment rate of 4.2% remains the lowest since mid-1970s. As ever, the devil lurks in the detail. Total hours worked declined by 0.3% as more of us worked part-time. More importantly, wage growth excluding bonuses slowed by 0.1%, to 2.8%. A net result of UK data this week is that the market implied probability of August rate hike weakened slightly to c50%. In other words, it’s now an almost perfectly balanced outcome.

Jobs, Jobs, Jobs. NI’s unemployment rate of 3.3% in the three-months to April was above its recent record low but was still the third-lowest-reading of all-time. Records continued to be broken with the Quarterly Employment Survey (QES) which confirmed a record number of jobs with growth evident across all the main sectors. Encouragingly the pace of job creation accelerated to 2.5% y/y – the fastest rate of employment growth since the seasonally adjusted series began in 2005. There was a net gain of over 18,610 jobs over the year to March 2018 – the largest annual gain since at least 2005. Two-thirds of this growth was amongst the service sector and full-timers. Manufacturing and construction are booming too. But while the former has hit its highest level since 2004, construction employment, though rising strongly, is still just three-quarters of its 2007 level.

Two directions. NI’s unemployment rate and jobs growth would suggest the economy is booming.  But the output data suggests otherwise. Service sector output and industrial production (mostly manufacturing) are moving in opposite directions. Services output rose by a robust 0.7% q/q in Q1 taking the index of services to a seven-and-a-half-year high. Growth over the last year has been a sluggish 1.1% y/y underscoring that the jobs growth has been largely low-value added occupations. Manufacturing job creation may be booming with growth of 4.3% y/y (+3,750 jobs) in Q1. But output fell by 0.9% q/q with a hefty 7.3% y/y fall. The latter largely reflects the disappearance of NI’s tobacco industry (i.e. JTI Ballymena). Manufacturing employment may be at thirteen-and-a-half-year highs but output is approaching five-and-a-half year lows. Manufacturing productivity appears to have gone up in smoke.

That’s more like it. Good news for the UK retail sector has been in very short supply this year as barely a week has gone by without a major high street name being in trouble. But May’s spending numbers suggest that might be changing. Sales in the last 3 months are now 4.2% higher than last year, 2.1% when you adjust for inflation. So there is growth out there, albeit retailers think the good weather and royal wedding might have provided a temporary boost. The problem is the channels are changing. Over a sixth of spending at clothes shops and department stores now happens online so it is no surprise that on some measures sales at bricks & mortar stores are falling.

Impact. An unstoppable force looks soon to meet an immovable object. The force is oil prices and its inflationary impact on global prices. The object is the deflationary effect of the former fall in sterling washing out, which had been lowering UK inflation. Yet even this was unable to prevent CPI inflation remaining unchanged, for now, at 2.4% annually in May. The next move is uncertain. So called ‘core inflation’ that strips out energy, remained stable at 2.1%, suggesting a certain weakness in consumer spending. Yet it’s unlikely the UK remain isolated from global price pressures for long.

Welcome. For a nation obsessed with housing, the UK property market is giving us very little by way of excitement. Recent trends continue, with annual growth in prices moderating, reaching 3.9% in April on official measures, down from 4.2% in March. On average, flats aren’t doing too great, with annual prices up just 1%. The cause is London (lots of flats), where the market remains weakest. Surveyors suggest the London market may be stabilising and prices are flat nationally. But a little quiet in the housing market is a good thing.

Great expectations. “Sell in May and go away” is the old stock market adage for traders. However, it doesn’t look like it resonates with the NI housing market. Newly agreed sales and expectations amongst local surveyors continued to rise last month as the property market entered its busiest period of the year. Prices continued to head north too. According to the latest RICS and Ulster Bank Residential Market Survey, instructions to sell homes hit a four-year-high in May. Amongst surveyors NI is the most optimistic region within the UK. Two-thirds of surveyors expect NI prices to rise in the over the next twelve months. Within NI there are notable property hotspots. East Belfast’s Ballyhackamore, dubbed ‘Ballysnackamore’ given its profusion of eateries, is one of these areas where demand outstrips supply.

Plainspeak. The US economy has been revving up. The data is currently indicating Q2 GDP running close to a very punchy 5% annualised pace. Not surprising then that the Fed hiked rates last week for the second time this year, a move widely anticipated. It also indicated a slightly stronger pace of tightening this year (two more hikes) and three further next year. That wasn’t all. Fed Chairman Powell is consigning the often cumbersome language of central bankers to the dustbin it seems, promising to speak in plain English and hold more press conferences. Stuffy central bankers no more? Let’s see.

Dawn. A big jump in euro area inflation in May, to 1.8% p.a., up from 1.3% in April. Coincidently, the European Central Bank finally took first steps towards unwinding its asset purchase scheme (QE). It will start cutting monthly purchases from €30bn to €15bn in September and end them by December. It will however continue to ‘reinvest’ maturing securities and there’s no change in rates until at least summer 2019. Firm forward guidance. It seems the ECB is slowly facing in the same direction as the Fed and that this is, perhaps, the twilight stage of the decade-long extraordinary monetary stimulus.

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