Chief Economist’s Weekly Brief Encouraging

An upbeat speech from Bank of England governor Mark Carney shortens the odds of an August rate hike

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Bullish Carney. Bank of England governor Mark Carney’s latest speech was upbeat about the UK economy, increasing the likelihood of an August rate hike. He downplayed disappointing Q1 GDP, highlighting the adverse impact of poor weather on the construction sector rather than the economic climate. He cited improving consumer spending and sentiment in Q2 whilst warning of an oil-driven rise in headline inflation near-term. Further evidence of tighter labour market conditions and nascent wage pressures may prove sufficient to convince a majority of the MPC to raise rates next month.

Mix. June’s encouraging UK services PMI survey bodes well for a pick-up in Q2 GDP. Not only did the headline index jump to an eight-month high but new orders rose healthily, aided by a weather-related pick-up in consumer demand. The weakness in Q1 growth looks increasingly like an aberration. A view espoused by Mark Carney in his latest speech. The manufacturing sector wasn’t quite as upbeat. It was unchanged at 54.4 and remains down from the levels seen late last year, with new business fairly subdued. Continued strength in the global economy will be the saviour here.

Steely growth. UK construction rebounded in Q2, judging from the latest upbeat PMI survey. The headline index moved up to 53.1 in June, from 52.5 in May, above market expectations. Notably, new orders jumped to their highest level since November 2017 and employment prospects improved. However, input costs are rising, led by steel prices, threatening profit margins. Still, the weather-driven downturn in Q1 looks likely to be short-lived, suggesting construction will make a positive contribution to Q2 growth. Historically-speaking this sector is volatile, so it is premature to draw any strong conclusions.

Buoyant Midlands. The latest regional PMI survey signalled business activity ended Q2 on a positive note. The Midlands was the star performer in June but the North East saw business confidence slump into negative territory. In contrast, its neighbour the North West posted a significant improvement. Employment prospects remain positive in the UK, led by Scotland with job creation rising to its highest level since early 2014. The exception was Wales, reporting a drop in staffing levels for the first time since February 2016.  This does not portend well for struggling consumers in Wales.

Hotting up.  June was the hottest month in Northern Ireland since 1846.  The heatwave may not be welcomed by our farmers but other businesses have received a boost. Ulster Bank’s PMI hit a four-month high in June with manufacturing and construction touching 44-month and 45-month highs respectively. Private sector firms continue to report robust growth in export orders and hiring continues. The bad news is inflationary pressures are intensifying with firms increasing the price of goods and services at the fastest pace in a decade. NI firms have been the least optimistic within the UK in five of the past six months. Brexit uncertainty is one factor. Lack of a devolved government is quite another.

Weak income. How do you determine the level of real (i.e. adjusted for inflation) household disposable income (RHDI). Well, it’s harder than you think. The ONS has proposed an (experimental) new method. But it tells a familiar story and one that many UK households will be familiar with. RHDI fell in 2017 for the second successive year, the first consecutive annual fall since 2011. As we all know inflation has been doing some damage on this front recently. But thankfully it seems to be in retreat. And things are also looking up due to the continued strength in employment, boosting total wages and salaries.

En Marche. Blame the World Cup, the hot weather, or even the boogie, but the euro area broke early for summer this year. Both unemployment and retail sales were unchanged in May. The unemployment rate was 8.4%, down from 9.2% in May 2017, the lowest since 2008. Portugal was the pick of the bunch, with unemployment falling from 9.2% in May to 7.3% in June. Oh, and there’s a slight negative relationship between World Cup performance and unemployment (think Germany) but it’s imperfect (think Greece). Still, on this measure, France (9.2%) just nudges past Croatia as EZ favourites (8.9%).

Same story. Similar to the trend observed for consumer prices in the euro area, prices paid by producers has also increased in May. Compared to last year, industrial producer prices rose by 3%, owing to the surge in oil prices. However, excluding energy, the increase was merely 1.4%, due to softening of the rise in capital and consumer goods. Overall, the inflation story does not look too threatening for H2 2018, with much of the stellar growth seen in 2017 behind us.

Mixed.  The latest US employment report was a mixed bag. On the one hand, non-farm payrolls posted a decent 213k rise in June, above market expectations, and has averaged a healthy 211k per month in Q2. On the other, the unemployment rate surprisingly rose to 4% last month, from 3.8% in April, driven by an expanding labour force. Wage growth remains sluggish. Witness a softening in average hourly earnings to 2.7%yoy in June versus 2.8%yoy in May. Still, the Fed looks set  to continued its gradual tightening stance in coming months, judging by June’s hawkish FOMC minutes.

March on. The US ISM manufacturing index registered 60.2 in June vs. expectations of 58.5 and last month’s reading of 58.7. Based on past relationships, this corresponds to an annualized GDP growth rate of a heady 5.2%. New orders, production and employment all showed healthy growth. However, the good news comes with a note of caution. The supplier deliveries index increased by 6.2 points to 68.2, signalling capacity constraints and not helped by things like uncertainty in the steel and aluminium market (Trump tariffs). Prospects of a trade war were also highlighted as a concern.

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