Chief Economist’s Weekly Brief – May bows out

The resignation of UK PM Theresa May has prompted a flurry of contenders for the Tory leadership – the contest officially begins June 10th with the victor likely announced by the end of July. Boris Johnson is the bookies’ early favourite, fanning fears about a possible no-deal Brexit. The strong showing of the Brexit party in EU highlights increased fragmentation in UK politics. Meanwhile, latest UK data shows consumers continue to open their wallets.


Above target. UK consumer prices moved above the BoE’s 2% inflation target for the first time this year: the annual pace of inflation accelerated from 1.9% in March to 2.1% last month, a tad below market expectations. The main drivers were rising energy bills and airfares. In turn, the timing of Easter and the energy regulator raising the cap on electricity and gas prices impacted these sectors. Services inflation should be monitored for signs of rising wage pressures. In April service sector inflation rose by 2.9% y/y, the fastest rate in two years and double the rise in goods price inflation.

In style. UK retail sales were broadly unchanged in volume terms between Mach and April. But after a bumper Q1 a slight cooling off is understandable. Still, compared to last year the volume of stuff bought was up over 5% (the average since the crisis is just over 3%). April’s slightly warmer than usual weather prompted a bit of tailoring wardrobes to Spring/ Summer ‘19 styles, clothing sales rose 2.3%m/m. Low inflation and a tight labour market supporting decent wage settlements should mean real income growth remains firmly positive. That should continue to lend plenty of support to the consumer.

Dinner party distress.  The pace of house price growth has more than halved over the past six months, to just 1.4% in the year to March.  With inflation now outstripping house price growth, the average home is now effectively worth £1,500 less than last year. The picture is even more stark in London and the South East where sale values are falling 1.9% and 0.4% respectively, unnerving homeowners. Still, would-be first time buyers and people hoping to move up the housing ladder will be glad to see wages rising more than twice as fast as house prices for the first time since 2012.

Coasting. Northern Ireland may be at the wrong end of the regional league table for many things. But not so house prices. In Q1 2019, the West Midlands was the only UK region to post higher rates of price inflation. Local residential property inflation has eased from 4.5% y/y in 2018 to 3.5% in the first quarter of this year (equates to a gain of £4,500).Significantly, this remains above consumer price inflation and broadly in line with wage growth. Conversely, in the UK, house prices are lagging both CPI and earnings. Within NI, the Causeway Coast and Glens is the star performer with annual price growth averaging nine per cent per annum over the last five years.

Mixed messages. In the world of residential property, prices attract the media attention but for economic growth it is activity (sales & housebuilding) that matters. Last year Northern Ireland posted the most mortgages for house purchase since 2007. UKFI stats point to continued growth in 2019 driven entirely by the first-time buyer market (FTB) with the home-mover market flat. The local FTB market has seen growth of 11% y/y and the most loans for a first quarter in sixteen years. Bank of Mum and Dad still appears to be lending a helping hand with £27k the average FTB deposit. Housebuilders have also seen a healthy year-on-year rise in completed dwellings in Q1. But with housing starts falling, 2019 looks set to be another year that NI undershoots the estimated 9,000 units p.a. that it needs.

All eyes on the PMIs. The global economy is finely balanced, the Eurozone’s especially, which elevates business surveys’ ‘weather warning’ capabilities. Unfortunately, the EZ ‘flash’ PMI seems to offer little clarity on which way the economic wind is blowing. May’s composite reading rose by a tiny margin, from 51.5 to 51.6, even as services slowed, from 52.8 to 52.5. And while manufacturing rose, from 48 to 49, it’s below the magic 50-mark. New export orders also fell, for the 8th successive month. Not only does this report signal subdued growth but it also forewarns that skies may be darkening.

No urgency. The message from the minutes of the April Federal Reserve meeting is that no move in interest rates for some time. A key area of discussion was the trajectory of US inflation. The majority of the committee opined that the recent fall in inflation was “transitory”. Some members, however, were concerned that continued low inflation could exert downward pressure on inflation expectations. This meeting preceded the latest escalation of US/China trade tensions, a downside risk of the UK economy. Still, the Fed appears in no rush to match the market’s clamour for an early easing.

Spring fall. US new home sales dropped by 7% in April to 673,000 after an 8% upward revision in March, driven by a shortage of affordable homes. The median price of a new house sold in April at $342,000, 12% higher compared to the previous month. Existing home sales also fell for a second consecutive month. The glut in affordable housing negated the effect of a strong labour market and low mortgage rates, keeping the housing market on the back foot.

OPEC holds the line. Oil prices, which have increased since the beginning of the year, exceeded $70/bbl (Brent, ICE) in early May albeit temporarily. Latest US sanctions on Iran and Venezuela’s demise are key factors, rising political tensions in Libya have also had an impact. The Trump administration is hopeful that OPEC+ countries will increase production to halt the latest oil price rise but there is little sign of this. The latest OPEC+ Joint Ministerial Monitoring Committee (JMMC) meeting in Jeddah discussed raising oil production but was not implemented. The focus will now shift to the next OPEC meeting in late June. Supply-side factors are supportive for oil but worries about weaker demand are on the rise.

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