Chief Economist’s Weekly Brief – Contrasting fortunes

The UK labour market remains in rude health, a key support for the household sector. In contrast, US and Chinese retail sales disappointed. Meanwhile, German growth rebounded in early 2019 but the economy remains fragile.  


Hard work keeping up.  The latest UK jobs figures feel a little underwhelming. The UK unemployment rate fell to a 44 year low of just 3.8% in March and the number of people in work rose by 100,000 in Q1 2019. Yet this jobs growth was driven almost entirely by a rise in self-employment; the number of full-time employees actually decreased by 55,000. Meanwhile, earnings growth (excluding bonuses) eased fractionally, to 3.3%, and the number of vacancies fell below its all-time high.

How low can ILO go? Northern Ireland’s ILO unemployment rate hit a fresh record low of 2.9% in Q1. That’s the joint-second lowest of all the UK regions and Japan is one of the few economies with a lower rate. So are we in some sort of labour market nirvana? The short answer is no. As far as local statistics go, the employment rate speaks much louder than the unemployment rate.  While the employment rate hit a record high of 71.3% in Q1 2019, it remains the second lowest of all the UK regions. Similarly, NI has the highest economic inactivity rate. Progressing up the regional rankings on these measures would be celebrated much more than achieving a superficial headline grabbing low unemployment rate.

Work longer, not smarter. UK productivity – output per hour – declined for the third consecutive quarter in Q1 2019 and was 0.2% below Q1 2018. This is the longest stretch of negative productivity growth since Q3 2013. It follows four consecutive quarters of declining business investment in 2018 and historically high levels of employment, which suggests that firms continue their strategy of increasing output by hiring workers instead of investing in new technology.

Table-topper. The NatWest UK regional PMI showed the North West remained at the top of the rankings for business activity in April: growth accelerated to a seven-month high of 55.2, Wales (53.0) and the West Midlands (52.6) ranked second and third. The North East eked out marginal growth, the first time in eight months (50.3). Only six of the twelve regions posted employment growth. Four regions registered falling output, new orders and employment: London, the South West, East and Northern Ireland – the latter posted the fastest rates of decline for all three indicators.

Satisfied pessimists.  Northern Ireland citizens are the most pessimistic about the UK’s economic prospects. So says a new Consumer Insights Report by Which? 42% of those surveyed thought the UK economy was in poor health with 60% anticipating it to worsen in the year ahead (UK=49%). Despite this, people in NI have the highest rates of overall life satisfaction. Optimism across financial wellbeing measures increases with age. Over two-thirds of pensioners were satisfied with their savings as opposed to just one-fifth aged 30-49 years. Meanwhile, more than one-third (37%) of 18-29 year olds had experienced financial difficulty which was four times the incidence amongst over 65s. Geographically, West Belfast was the most financially squeezed constituency with North Down the least. Foyle stands out as having one of the highest loans to earnings ratios within the UK.

It rains, it pours. China responded to Trump’s tariff hikes with its own last week, increasing levies on about $60bn of US imports. If that’s a harbinger of tougher times ahead it won’t have helped that April’s economic data showed China can’t shake off the effects of last year’s slowdown, despite recent stimulus. At 7.2%y/y, retail sales growth registered its weakest pace in sixteen years. Industrial production grew 5.4%, matching last November’s pace which was the slowest since the financial crisis. It had been expected more stimulus was on the way. After last week the chances of that have grown.

Divestment. Latest monthly US capital flows (TIC) data revealed that China sold a net $20.5bn of US Treasuries in March, a two-year high. Such data fuels rising concerns that the Chinese authorities could use US government bonds as a potential “weapon” against the US as trade tensions ratchet higher. March’s data preceded US President Trump’s announcement of 25% tariffs on $200bn of Chinese imports, raising the risk of further Chinese sales of US Treasuries in Q2 2019. China remains the largest holder of US government bonds at $1.12 trillion, followed by Japan. But for how long?

Swings and roundabouts. US markets and economic data have been swinging wildly in recent weeks. We’ve seen record low unemployment as well as sharp falls in equity prices. Last week’s retail sales data followed the volatile trend by showing that sales had fallen slightly in April, down from spectacular growth in March. Taking a longer view sales growth is holding up well, so this report contains more noise than signal, but it makes the Federal Reserve even more likely to be cautious and wait longer before deciding its next move.

Cautiously Optimistic. German GDP increased by 0.4% (q/q) in the first quarter of 2019, dispelling fears of recession and provided some respite – domestic demand increased and consumer spending rose. GDP figures were aided by higher industrial activity, which has been dismal over the last six months.  The flash Euro area GDP also increased by 0.4% versus the previous quarter, but mounting US/China trade tensions suggest this data should be taken with a pinch of salt!

The ides of March. Another poor month for the Eurozone’s beleaguered industrialists. Output fell by 0.3% between February and March and, ignoring an uncharacteristically supercharged January when output leapt 2%, production seems stuck in a state of decline. But hark Germany, who managed a surprising volte face to proudly boast a 0.4% rise in production. Also welcome is the continued rise in employment, up 0.3% across the euro area in Q1, extending the employment growth run to 22 quarters, or 5½ years. Nice.

Record high. US household debt increased by c.$1bn in Q1 2019, surpassing its global financial crisis peak by $1 trillion dollars! Much of the increase came from newly originated auto loans, thanks to Americas’ love for the wheel. However, things might soften a bit in the near term. Details within the New York Fed report showed that while mortgage balances rose, originations declined. Further, credit enquiries over the past 6 months fell to the lowest level, mirroring the long-term trends in credit market participation discussed in the accompanying blog post.

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