Chief Economist’s Weekly Brief – Onward and upward

The MPC voted unanimously to raise interest rates and the Fed looks like it is warming up for more of the same


Rate hike ahoy! The Bank of England’s Monetary Policy Committee raised rates by 0.25%, to 0.75%, noting that the UK economy’s Q1 slowdown looks increasingly like a temporary soft patch. There were no dissenters, as the two members thought most likely to want to see more evidence of rising wage growth, Jon Cunliffe and Dave Ramsden, both voted with the majority. The MPC emphasised its guidance that future rate rises would be “limited and gradual” with Governor Mark Carney indicating that the market’s expectation of 3 rate rises over the next 3 years was consistent with that guidance. The move lifts Bank Rate to its highest level since February 2009, but that’s not true for most interest rates households or businesses face. In early 2009 the average mortgage rate being paid in the UK was 4.1%, today it is just 2.5%.

Borrowed time. Saint Augustine’s brutally honest maxim, “Lord make me chaste – but not yet” was almost penned for UK consumers. Even as the cash savings ratio turns negative, borrowing remains high (clue: the two are related). Consumer credit rose by 8.8% annually in June. The slowdown from a 10.9% peak has stalled (if anything the pace has accelerated a little). Mortgage borrowing may appear more modest, up 3.2%y/y in June. But as mortgage debt equals £1.4 trillion that is an extra £4 billion. Borrowing provides some support for the UK economy, but, unsurprisingly, it’s support that also is ‘borrowed’…from the future.

Brexit wound. The latest NI Chamber and BDO Quarterly Economic Survey points to subdued growth by local businesses during the second quarter of the year. The lack of a devolved government was identified by firms as a key factor impacting negatively on the Northern Ireland economy, with Brexit also weighing on business leaders’ minds. One third of Chamber members surveyed said that the Brexit decision has had a negative impact on their turnover or sales, with just seven percent saying that it has provided a boost. The most negative impact however has been around costs, particularly of raw materials, with nearly half of firms stating that their business has been negatively impacted by higher costs since the vote took place.

From solid to strong. The outcome of FOMC meeting in June was no surprise as the Fed decided to keep rates unchanged in the range of 1.75%-2%. However, there is one word that it added and held on to in its statement – STRONG. ‘Strong’ rate of economic activity supported by ‘strong’ consumer and investment spending alongside ‘strong’ job gains were an upgrade from its earlier assessment of a ‘solid’ performance of the US economy. While this view might not fit in well with that of the White House, the Fed has continued to signal more rate hikes, with September now looking more likely.

Buoyant here. One thing that isn’t fake news is the health of the US labour market. The economy added 157k jobs in July, below the 190k estimate. But throw in upward revisions totalling 59k to May and June and it’s a comfortable beat. The unemployment rate ticked down from 4% to 3.9%. So what are firms hiring for?  Well, making more stuff (manufacturing added 37k jobs in July and 327k over the past year), building stuff (construction – 19k in July and 308k over the past year), care stuff (health sector – 17k and 286k) and keeping people stuffed (food and drink service industry – 26k and 203k).

Buoyant there. The US services PMI edged down from 56.5 to 55 in July. It may be the lowest level since April but it still points to robust growth in the economy. New orders are flooding in but cost burdens are edging higher with firms reporting higher wage and transportation bills. The manufacturing PMI tells a similar story, falling to its lowest level in five months. But at 55.3 it looks robust on a historical basis. And firms are reporting plenty of strength in domestic demand with new orders rising. The biggest problem for manufacturers is sourcing inputs. Suppliers delivery times reached their highest ever level.

Out of steam. Preliminary estimates of the second quarter GDP confirm slowing growth in the Eurozone. QoQ growth slowed from 0.4% to 0.3% – the slowest rate since Q3 2016. The preliminary GDP data does not include a breakdown by components or countries. But previous data showed France grew by a rather uninspiring 0.2% in Q2. And Germany’s growth slowed substantially in Q1 (from 0.6% to 0.3% QoQ). The spectre of a trade war with the US will likely further hurt sentiment in future months.

Softer Footing. The final Eurozone Composite PMI for July remained unchanged from the flash reading at 54.3, lower than June’s print of 54.9. The drop was attributed to a loss of momentum in the rate of expansion in the services sector. No cheer from the subdued manufacturing PMI either, unless a minor recovery to 55.1 in July from the 18-month low of 54.9 in June makes you happy. Business confidence at a 20-month low is certainly not helping matters. If the PMI doesn’t recover, it’s likely that GDP will continue to grow at the subdued pace it did in Q2.

Disparate improvement. The eurozone’s unemployment rate remained unchanged in June at 8.3%. This is the lowest level since December 2008. All Eurozone countries saw falling unemployment rates over the past year. However, disparity between the countries persists with the lowest rate recorded in Germany (3.4%) and the highest in Greece (20.2%) and Spain (15.2%)

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