Chief Economist’s Weekly Brief – Brexit stymies BoE

The Bank of England is more upbeat about the UK economy than three months ago, but its hands are tied by Brexit. Across the Atlantic booming employment coupled with a 50yr low in the unemployment rate looks set to keep a lid on expectations of a rate cut by the Federal Reserve.


Upgrade alert! The Bank of England upgraded its UK 2019 growth forecast from 1.2% to a more spirited 1.5%, almost entirely reversing February’s downgrades. A relatively strong start to the year, with 0.5% growth expected in Q1 alone, lay behind the increase. Such strength has been boosted by Brexit-related stockpiling, but most of the improvement has come from a household sector basking in job creation, wage growth and restrained inflation. The next couple of quarters could be volatile as some firms are likely to partially unwind their stockpiling, but further out the Bank of England thinks growth could be sustained by the unemployment rate falling even further, towards 3.5%.

Gradual. Tighter labour market conditions are likely to prompt even stronger UK wage growth, so the MPC’s guidance that interest rates are likely to rise gradually still stands, particularly as excess demand builds over the medium-term. But with no-one suggesting a raise at May’s meeting those rises look to be the other side of a Brexit agreement.

Bounce. Last month’s UK services PMI edged back above the 50-mark to 50.4, March’s reading of 48.9 was the lowest since mid-2016. It’s not rude health but it’s perking up at least. And it appears that this survey, and others, have been overstating the impact of political uncertainty on the economy. The hard data suggests the economy has had a decent first quarter. One interesting footnote on the industry breakdown – ‘Computing and IT’ services have bucked the trend, hitting a two and a half year high. Perhaps a hint that firms are looking to bolt on new technology and software to their operations? After all, if there is to be a productivity revival this is one of the crucial ingredients.

Past its peak. The UK manufacturing PMI index slipped from March’s 13-month high of 55.1 to 53.1. in April, driven by an unwinding of the recent build-up in inventories. Export orders fell last month at their second-fastest rate in four-and-a-half years, suggesting the UK is succumbing to the global manufacturing slowdown. Notably, some firms reported that overseas clients are re-routing supply chains away from the UK due to Brexit uncertainty – the latter is also impacting the construction industry. Housing remains the one bright spot, aiding construction output though orders are declining, a warning sign.

That’ll learn ya. ONS research reveals that over two-thirds of the UK workforce are employed in jobs that match their educational attainment. But one-third are either overeducated or undereducated, meaning educational qualifications are either above / below the occupation average. Northern Ireland has seen the proportion of its undereducated workers fall from 22% in 2010 to just over 18% in 2017 – a seven-year low. Despite this fall, NI is still ranked second in the UK (after the West Midlands) for this measure. Being overeducated for a job represents an underutilisation of resources and a form of underemployment. Some 14% of NI workers fall into this category. A mismatch of skills / qualifications in the labour market clearly impacts negatively on productivity.

Steady hand. The Federal Reserve left policy on hold at its latest meeting as expected, reiterating its “patient” stance on monetary policy. US growth and recent job gains were described as “solid”, a slight upgrade from the previous Fed meeting in March. On inflation, the Fed acknowledged US inflation (headline and core) is running below the 2% target. However, in his latest press conference Fed Chairman Jay Powell stressed recent weakness in inflation was “transitory” rather than permanent. Hence the Fed is content to sit on its hands for the time being.

Cautious optimism. US non-farm payrolls surged by 263,000 in April and unemployment rate fell to 3.6%. This was the lowest reading since December 1969, a time when Boeing’s jumbo jet made its first passenger flight from Seattle to New York!  Hiring in professional and business services, construction and health care was brisk. Still, the conundrum faced by the policy makers is likely to stay. An unimpressive wage growth of 0.2% over the month – 3.2% yoy – is expected to keep the central bank in wait and see mode in coming months.

Breaking News. The US ISM Manufacturing Report dropped 2.5 percentage points to 52.8 in April. While that’s not exactly screeching to a juddering halt, it’s a jolting slowdown nonetheless. More sobering, new orders fell by 5.7ppts to 51.7, uncomfortably close to the magic 50 mark, below which signals contraction. The key question is whether this is blip or a slip road leading US manufacturing to a slower, bumpier highway. We’ll have to wait till next month before assessing. But a repeat of this and the calls for a rate cut will only intensify.

¡Ay, caramba!  The flash estimate for Euro area economy growth revealed a surprisingly respectable rate of 0.4% during the first quarter of 2019.  Contrary to latest downbeat surveys, growth in the region appears to have picked-up recently. Indeed, the Euro area has already chalked-up more growth in the past three months than it did over the second half of 2018. Italy’s economy expanded by 0.2% in the first quarter, ending a short-lived recession, French growth was a modest 0.3%. The most impressive performance is evident in Spain – the fourth largest economy in the EU – which posted a strong 0.7% rise in Q1 2019, leaving it 3.3% larger than a year ago and an impressive 16% above 2013.

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