Chief Economist’s Weekly Brief – Deal or no deal?

US/Sino trade tensions are rising. US President Trump’s announcement of new tariffs on Chinese imports has prompted threats of retaliation by China, posing downside risks to the global economy as supply chains are disrupt and business sentiment suffers. Meanwhile, UK Q1 GDP data highlights the resilience of the UK economy.

Puttin’ the squeeze on. President Trump upped the ante in US-China trade negotiations last week, jacking up tariffs on $200bn worth of Chinese goods from 10% to 25%. Earlier hikes in tariffs have had, to date, a limited impact. A combination of the tariffs being devised to be felt by Chinese suppliers, a falling Chinese currency and producers accepting smaller margins blunted their efficacy. This time it might be harder to insulate US consumers from the effects, a little upward pressure on prices may be unavoidable. Who has more to lose? Well, Chinese exports to the US are equal to about 2.5% of China’s GDP. For the US it’s much smaller, around 1%. But that’s just one angle to the trade war, there are a host of others.

Surprisingly good. The UK economy grew by 0.5% in the first quarter of 2019, easily bettering the 0.2% increase at the end of last year. Perverse as it may seem, the looming threat of a ‘no deal’ Brexit actually boosted activity. Firms’ preparations saw them stockpile goods, leading to a 2.2% jump in manufacturing output as they added to inventories. Meanwhile, households shrugged off any doubts over Brexit, with solid growth in consumer spending underpinning a good performance for the wholesale and retail sectors. Trade continues to pose challenges for global Britain though; a surge in imports pushed the underlying trade deficit up to 2.3% of GDP, weighing on growth.

Buoyant. Brexit preparations may have played a role in boosting UK manufacturing last quarter, but growth in services output was supported by more domestic factors. The buoyant UK jobs market, rising wage growth and subdued inflation environment has been boosting households’ finances of late. It hasn’t taken long for the consumer to start spending these gains. Accordingly, the retail sector made the largest contribution to growth in Q1, increasing by 1.2%. At the other end of the scale, and somewhat unusually, business services fell in Q1. Finance and insurance appear to have played a role here, but with corporate borrowing picking up that drag could prove temporary.

Bottom of the league. Yesterday Pep Guardiola celebrated as Manchester City pipped Liverpool for top spot in the Premier League. Today, the NW of England found itself top of the UK PMI table. Northern Ireland meanwhile is at the other end of the spectrum in terms of private sector performance. Having been vying with other regions for bottom spot over the past year, we are now firmly rooted there. In the latest report, NI private sector output, orders and employment all posted their fastest rates of decline since the final quarter of 2012. Forward looking indicators also continue to provide cause for concern. NI businesses have pointed to a range of factors behind this poor performance. The lack of decision-making from ‘gaffers’ at Stormont, alongside Brexit uncertainty, are the two key ones that keep coming up.

Borrowed time? April’s US ISM non-manufacturing report was reassuring in its blandness. The main index fell slightly but remained a respectable 55.5, while activity rose to an impressive 59.5. New Orders, although lower, were still a laudable 58.1. In short, US business activity is growing but slowing, while firms remain optimistic. More noteworthy is time. The index has signalled growth for 111 months now, or 9 ¼ years in old money. By July, the current economic expansion will be the longest in the nation’s recorded history, surpassing the 120 months chalked up between 1991 and 2001.

Chinks of light. Beating market expectations and sending positive signals for the German economy, industrial production in March rose by 0.5% (m/m), its fourth consecutive monthly increase. This rise was driven by two sectors, namely manufacturing and construction which increased by 0.4% and 1% respectively compared to February. The latest manufacturing PMI surveys, however, remain weak. Still, judging from the modest pick-up in GDP in Q1 2019, the latest downbeat surveys are painting too gloomy a picture for the euro area’s largest economy.

Irish tills are ringing. Despite continued monetary stimulus, Eurozone inflation has remained below the ECB’s ‘close to but below’ 2% target for most of the last six years. April was no different though inflation picked up from 1.4% y/y in March to 1.7% y/y. Still not strong enough to tempt the ECB to raise rates off the floor. Some countries need these low rates more than others. Retail sales growth was 1.9% y/y in March but this concealed big differences at a country level. Amongst the ‘Big-2’, France’s lacklustre performance (+1.2%) is offset by robust growth in Germany (+3.2%). Ireland posted a whopping 10.8% y/y rise which contrasts with falls in Austria, Belgium & Slovakia.

Is all economics local? And might this have implications for how we map, model and manage the economy? So asked Andy Haldane, Chief Economist at the Bank of England, last week. The UK is a very unequal country: incomes, wealth, wellbeing and health all have distinctive spatial patterns, often with a North-South divide. If we know that people’s experiences around the country are so diverse, should we reflect it in our models and ultimately policy? Economists are lagging behind in developing complicated models, which include a large number of actors with distinctive characteristics. But with innovative and close to real-time data becoming available, the BoE expects developments in this area.

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