Chief Economist’s Weekly Brief – Lacklustre

UK growth rebounded in Q2, but outlook is clouded


Unimpressive. Latest monthly GDP figures confirmed the UK economy recovered from a weak Q1, posting an unimpressive 0.4% rise in Q2, matching market expectations.  Over H1 2018,  GDP growth was unchanged from the last six months in 2017. Indeed, with services output, the main contribution to Q2 growth, losing momentum in June, the outlook is unclear. Further disappointing UK data would cast doubt on the need for the BoE’s latest 25bp rate hike.

What squeeze? Services output grew 0.5% in Q2, a thumping pace not bettered in the last 18 months. The main driver? Retail. That embattled sector grew an astonishing 2.1% in a single quarter. How does this fit with the story of UK households having their incomes eroded by inflation? Well, much of the headline growth appears to be a bounce back from Q1’s dismal results.

Not so sweet-spot. The Bank of England likes to point out that business has been pretty good for UK’s manufacturers. They benefit from a weaker currency when exporting but are still part of the EU’s single market, for now. But it looks like Q2 wasn’t so sweet after all. Manufacturing output shrank by 0.9%, the main contributor to a fall in overall production of 0.8%. It was the metals, electricals, machinery and transport sectors that were weakest. There was some growth to be had. Food manufacturing was up 1.1% and pharmaceuticals up 3.1%, but these weren’t enough to offset falls elsewhere.

Stable but not so strong. Traditionally UK house price growth exceeds consumer price inflation.  That trend has broken down lately. House price growth has been lacklustre and the era of double-digit house price rises a distant memory. Halifax’s latest survey reveals prices are back above inflation with house prices accelerating to 3.3% y/y in the three months to July, up from 1.8% in June. That’s the fastest rate of growth since November. Despite this latest improvement, housing market activity remains soft with activity pretty flat.

Supply lacking not confidence. Confidence in Northern Ireland’s housing market remains higher than elsewhere in the UK, according to the latest RICS and Ulster Bank Residential Market Survey. Local surveyors expect to see an increase in the number of houses sold over the next three months and over the year ahead. This is in contrast to other regions, notably London, where sales expectations for the year ahead are in negative territory. RICS says that with houses in Northern Ireland more affordable than elsewhere, people here still want to buy their own home. The main challenge remains there isn’t the supply of properties to meet the demand.

Top & bottom.  Northern Ireland’s private sector posted the fastest rate of growth of all the UK regions in July. Wales & Scotland also saw activity accelerate whereas a number of English regions reported a notable slowdown. Output & new orders amongst NI firms hit a six-month high but the pace of job creation eased to a twelve-month low. Overall, current business conditions are encouraging. But will it last? Significantly, local firms are the least optimistic of all UK regions about business activity for the year ahead. In particular, the local construction industry remains the least optimistic by quite some margin. Suggesting the growth outlook rests on shaky foundations?

No cheer. In the 3 months to June 2018, the total UK trade deficit widened by £5bn, lifting the deficits of goods and services to £8.7bn. This was mainly due to a weaker exports of cars and aircrafts, and higher imports of unspecified goods. Evidence of Brexit can be seen in lower exports to the EU and rising imports from non-EU. The services surplus of £0.7bn is small, but still a relief. In the 12 months to June 2018 services surplus widened by £3bn as exports outpaced imports.

Benign. US core CPI posted a 2.4% y/y in June, the highest rate since September 2008. Headline inflation, however, was unchanged at 2.9% last month thanks largely to softer energy prices. Indeed pipeline price pressures appear to be building, judging from latest core PPI data, keeping the Fed on track for another modest hike in September.

Tariffs, shmariffs. China’s export machine is still purring, despite the steady build-up of US tariffs, both real and threatened. Overseas shipments rose 12.2% y/y in July, both the EU and the US delivered strong figures. The caveat is that it’s early days for the tariffs. It will be next month before we get a full month’s tariff effect reading. And it seems that there’s some front-loading happening with exporters pushing goods out the door quick sharp to beat the imposition of the levies.

Amidst concerns. Japanese Q2 GDP surprised on the upside, rising 1.9% on an annualised basis, more than reversing a 0.9% contraction in Q1. In other words Japan avoided a technical recession. Phew! Previous quarter’s tailwinds- private consumption (60% of Japan’s economic activity) and capital expenditure were the main drivers of growth in the three months to June. However, rising global trade tensions and increased tariffs particularly auto tariffs suggest capital spending may have peaked. One source of comfort for the Japanese economy is the  BOJ’s extended period of stimulus

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