Chief Economist’s Weekly Brief – Deadlock

UK PM Theresa May failed for the third time to get Parliament to ratify her Withdrawal Agreement. More indicative votes take place in the House of Commons today. The probability of cross party support for a customs union has increased, but it is still hard to see how the impasse is solved. The UK is now due to leave the EU on 12th April, but a longer extension of Article 50 looks likely.


Unfazed.  Despite all the Brexit shenanigans, UK consumer credit is still growing at a fair clip: up 6.3% in the year to February.  Both credit card balances and other loans & advances have seen growth accelerate in recent months, indicating that households feel confident enough to keep spending on everyday items and larger purchases. Not all is rosy though. The number of mortgage approvals dipped 4% to 64,300 in February, while businesses opted to repay £3.8 billion in finance rather than borrowing more to fund capital investment.

Consumer trends. Household spending posted a modest increase in Q4 last year, driven by rising real incomes. Housing, furnishing, household equipment and maintenance made significant positive contributions, more than offsetting weaker spending on miscellaneous goods & services. UK household spending per head nudged higher to £5099 in Q4 2018 with consumption on services maintaining its upward trend since 2009. Households remain the key support for UK growth.

No 5 is alive. While the fear of robots replacing workers en masse is not new, that doesn’t preclude the possibility that they will. The risk depends on whether you look at jobs or tasks. Around 1/3 of jobs carry a high risk of automation in the next 10-20 years. Yet few jobs are fully automatable, and a task-based approach lowers this to 7-10%. To assess your own risk use this rule of thumb: if ½ of your colleagues are high skilled then the probability of automation is always under 35%. Also, seek roles with ‘advice’, ‘plan’ and ‘care’ in the spec., while avoiding those asking you to ‘operate’, ‘assist’ or ‘clean’.

Bottoming out? Some good news for buyers hoping to get a foot on the property ladder, affordability didn’t get worse. On average, full-time employees were expected to fork out 7.8 times their earnings to purchase a home close to their workplace. At a local level, affordability worsened in the South of England compared to the North. Moreover, the gap in affordability between the most (Copeland, Cumbria) and least (Kensington & Chelsea) affordable areas is now wider than ever. One ray of hope is that the overall affordability metric stabilized for the first time in five years.

Traction? It’s just one month, but China’s efforts at stimulating the economy since late last year may be gaining some traction. The official manufacturing PMI rebounded from 49.2 in February to 50.5 in March, the highest reading since last summer. An alternative PMI, more focused on smaller firms, told a similar story, hitting its highest since July. If sustained it’s good news for the global economy, suggesting the downturn in the industrial cycle that took hold in the second half of last year may be easing. In all likelihood the Chinese authorities haven’t finished with their stimulus measures.

Downbeat. The Euro area economic sentiment indicator (ESI) dropped by 0.7 points to 105.5 in March, the lowest since October 2016. Notably, industrial confidence dropped sharply last month (1.3pts), led by weakening expectations for production and future orders. Country-wise Germany (-1.8) and Netherlands (-1.3) experienced a sharp decline, more than offsetting a remarkable improvement in Spain (+2.3). Ongoing geopolitical uncertainties, such as Brexit and US/China trade tensions, alongside low economic confidence in euro area point to a continued dovish ECB stance in coming months.

Falling. US housing starts surprised on the downside in February, plunging nearly 9% to 1.16 million, the lowest level in over eighteen months. One caveat is the recent bad weather. Still, the message is the same. A key cyclical sector of the US economy is clearly slowing. A similar picture was evident for building permits, falling for the second consecutive month. The one saving grace for the household sector is the recent sharp fall in mortgage rates, driven by lower longer-term US Treasury yields. This should boost refinancing rates, providing support for this struggling area.

Are you ready? Whether you believe that climate change is caused by human activity or not, the international initiatives to reduce carbon emissions are gaining pace, impacting your life. In his latest speech Bank of England governor Mark Carney, an active champion of managed transition to low-carbon world, outlined some of the new requirements which will affect the financial sector – and as a consequence the overall economy. Financial institutions soon will be expected to actively manage and disclose climate-related risks, including scenario analysis. On top of that next month PRA will ask insurers to conduct a climate-related stress test. Testing the banks, and possibly other financial sector participants, look set to follow.

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