Chief Economist’s Weekly Brief – Different strokes

The US economy is motoring along, driven by recent tax cuts, keeping the Fed on course for further gradual tightening in coming months. However, signs of weakness in the Euro area mean a rate hike is some way off.


While it lasts. The US mid-terms are next week. Handy then that Trump can point to a fired up economy as he attempts to keep control of both houses of Congress. GDP notched up a punchy 3.5% annualised pace in Q3, down a little from 4.2% in Q2. Consumer spending remained robust at 4% annualised. Government spending was also buoyant. But the report wasn’t without its concerns. Investment was disappointing, particularly when there are numerous reasons for it to be strong, including recent tax cuts, strong business confidence and difficulties recruiting staff. Meanwhile, residential investment fell for the third consecutive quarter. At what should the finger be pointed?  It could well be those Fed interest rate hikes.

Sit tight. Modest to moderate economic growth – that’s what the majority of the US regions reported in the Fed’s 7th Beige Book of the year. Things looked good as internal demand remained strong and consumer spending modestly increased. At the same time though, the economy wasn’t completely unscathed by trade uncertainties and a taut labour market. On the one hand, input costs are rising, beleaguered by impending tariffs. On the other, businesses have found themselves worrying about labour shortages and retention. In other words, supportive of a Fed biased toward tightening rates further! 

Whoa. The Eurozone economy seems to have stumbled recently. Key evidence is October’s ‘flash’ PMI, which slipped from 54.1 to 52.7 on the month, the lowest level in over two years. Both services and manufacturing fell, with the decline in new manufacturing exports particularly steep, due to a likely slowdown in global trade and the fallout from changes in European auto emissions standards. Some perspective is useful mind. Firms are hiring and the region’s economy remains on track to grow by 0.3% in Q4. Manufacturing exports should also rally a little. So the panic button can safely stay under lock and key.

Rendezvous in December. Surprise, surprise. The ECB left rates unchanged at October’s Council meeting, as expected, but ECB President Draghi stressed QE is on course to be halted by year-end. Mr Draghi acknowledged recent soft business surveys but remains confident of a continued gradual Euro area upturn, leaving risks to growth as “balanced”. The ECB anticipates a gradual rise in core inflation over the medium-term, driven by rising wage growth and elevated capacity utilisation. Still, a rate hike is a long way off as the ECB maintains an accommodating monetary stance.

Fixing the roof while the sun shines. The Euro area’s government deficit and the stock of public debt both narrowed in 2017 compared to 2016. What’s even better is that the favourable trend has persisted into the first half of 2018 as the majority of  member states have continued to pay down public debt. Thanks to a mix of low interest rates, solid growth and fiscal austerity, the currency union’s deficit fell to a mere 0.1% GDP in Q2, the lowest recorded value. Yet, the European Commission can’t sit pretty. 2019 looks challenging in face of Brexit-related uncertainty and ‘profligate’ Italian budget plans.

Passing the ports. UK trade in services in Q2 2018 saw an increase for both imports and exports from the previous quarter. Exports increased by 8% to £72.3bn. The value of exports to the EU, still the UK’s largest trading partner, increased by £2.3bn mainly due to exports of ‘other business services’ to Ireland and Italy. And it doesn’t need to be said but Brits love a trip to Spain. A Spanish travel bonanza was the primary driver of higher imports from the EU,(which were up by £3.2bn).

Widening deficit.  There are still signs of growth in the Northern Ireland economy in Q3 but growth remains fragile. That’s according to the latest survey from the NI Chamber of Commerce & BDO. Manufacturing is outperforming services across most indicators. Recruitment difficulties and a widening skills deficit are key takeaways across both sectors.  Indeed, these skills shortages are having a negative impact on productivity of half the firms surveyed. Almost 80% of businesses who are hiring are finding it difficult to attract the right staff.  This ranges from professional / managerial services jobs to skilled trades in manufacturing.  When the supply of anything lags behind demand, the price goes up. Wage pressures look set to intensify in the year ahead.

Equal pay for equal work? 48 years after the introduction of the Equal Pay Act there is still room for improvement. In 2018 the UK pay gap for full-time workers was 8.6%, a record low. Including all workers the gap rises to 17.9% due to more women working in lower paid, part-time jobs. The pay gap is near zero for full-time workers aged 18-39 but widens after 40 years. The pay gap varies by occupation greatly and on a regional basis. Northern Ireland remains the only UK region with a gender pay gap for full-time employees in favour of women. Women earned 3.5% more per hour than men in 2018. That’s due to their dominance in the better paid public sector.

Kerching! Anecdotal evidence of strong wage growth in Northern Ireland’s private sector was confirmed in the Annual Survey of Hours and Earnings. Weekly earnings increased from £500 per week in April 2017 to £521 in April 2018. This 4.2% increase was the largest rise across all the UK regions. Significantly this was above the rate of inflation and equated to a 2% real terms increase. This headline conceals contrasting fortunes for the private and public sectors. The latter has been subjected to pay caps / freezes and annual earnings for a full-timer fell by 1.7% to £31.9k after adjusting for inflation. Conversely, the average private sector employee saw annual pay jump to £24k – a real terms rise of 2.4%. Despite these gains, private sector wages are still on average £1,100 per annum lower in real terms than a decade ago. Ouch!

Sliding. China’s currency has been weakening of late, so too its stock market. In the past six months the Chinese Yuan has fallen 9%, driven by softer economic activity at home and trade tensions abroad. Indeed, the currency has recently skimmed levels not seen the financial crisis. That makes China’s exports more competitive and so potentially offsets some of the impact of Trump’s tariffs. But China won’t want to see it depreciate too much. Intervention to prevent further material falls are likely. It all evokes memories of 2015-16 when a bout of financial turbulence prompted substantial capital outflows from China and more than a few global jitters.

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