Chief Economist’s Weekly Brief – Waning US growth

A weaker than expected US employment report is adding to rising concerns about the global economy, fuelling expectations that the Federal Reserve will cut rates soon, possibly this summer. ECB president Draghi signalled the door is open for further monetary measures to support the weak Euro area economy, if needed.  

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Disappointing. US non-farm payrolls surprised on the downside in May, rising only 75k. March and April data were revised down sharply. The pace of jobs growth in the service sector halved last month, manufacturing hiring barely rose. Wage growth is also cooling, rising 3.1% in the year to May. Federal Reserve Chair Powell stressed the central bank was “closely monitoring” the impact of trade tensions on the US economy. Further evidence that rising global headwinds are adversely impacting US domestic demand would intensify pressure on the Fed to cut rates, possibly this summer.

Slipping. The US ISM manufacturing index edged down to 52.1 in May compared to 52.8 in April, softer than markets anticipated. The breakdown of the latest survey was mixed. On the one hand, new orders moved modestly higher in May. On the other hand, production weakened. Meanwhile, the non-manufacturing survey was more encouraging: the headline index rose to 56.9 in May, from 55.5 in April, pointing to continued expansion in the services sector.

Extension. ECB President Draghi’s latest monthly press conference was dovish, signalled further monetary measures would be taken, if needed, to shore up the fragile Euro area economy. Mr Draghi announced a rate hike would be pushed out to “at least through the first half of 2020”, from “at least until the end of 2019” previously. He also hinted at a possible rate cut (discount rate currently -0.4%) and a resumption of QE if downside risks to Euro inflation materialise.

Below target. Eurozone inflation slumped to a thirteen-month low in May, intensifying pressure on policymakers to inject more stimulus into the economy. Last month’s 1.2% y/y reading compared to 1.7% y/y In April, well below the ECB’s below, but close to, 2% target. The core measure – which excludes volatile items such as food and energy – also disappointed expectations: inflation eased to 0.8% in the year to May. Markets increasingly doubt the ECB’s ability to hit its target over the longer-term with inflationary expectations drifting closer towards one per cent rather than two.

Consumer boost. While fears abound for the global economy at the moment the Eurozone consumer is doing its best to prop things up. Q1 GDP growth was confirmed at 0.4% last week. Not exactly sparkling, but a steady improvement on the previous two quarters which registered 0.2% and 0.3%.  The main driver of this turnaround has been household expenditure, which rose 0.5% in Q1. Spending was probably helped by the improving labour market. Employment was up 1.3% in Q1 on the same time a year ago. But hopes of a wages boom will have to wait. Productivity growth has fallen close to zero and was last this low in the depths of 2012’s sovereign debt crisis.

In places. May’s reading of the UK services PMI had something for everyone. A reading of 51 is hardly shooting the lights out but it was up from 50.4 in April. Meanwhile the employment index moved back above its long-run average and the future activity index reached a seven-month high. Pessimism does not reign. Indeed, in some quarters respondents were cautiously optimistic. The computing the IT services sector remains firmly buoyant with business-to-business services also healthy. By contrast the transport & communication and financial intermediation sectors were far more downbeat.

Problems ‘made in Britain’.  May’s manufacturing and construction headline PMI index contracted. The weak construction PMI (48.6) indicates that Brexit uncertainty is taking its toll on capital investment, with commercial and civil engineering work suffering.  Meanwhile, the manufacturing PMI dropped to its lowest level in nearly three years (49.4) as firms responded to the temporary Brexit hiatus by running-down their ‘No Deal’ stockpiles instead of placing new orders.  This headwind should recede over coming months, as inventories return to more normal levels.  Still, reports suggest that some European firms are diverting supply chains away from the UK, hinting at weaker demand for UK goods over the medium-term.

3,4,5,6,7. Private sector business conditions continued to deteriorate amongst local firms in May. That’s according to the latest Ulster Bank PMI. Output, orders and employment have been decreasing for three, four and five months respectively. All four sectors posted falling output for the first time in six years. Manufacturing finally joined the other sectors in May in contraction territory. Brexit stockpiling – which had temporarily boosted manufacturing performance – has receded. As a result, the global slowdown afflicting other economies is now more evident in Northern Ireland. Domestic forces are also at play. Retailers saw sales drop at their quickest pace in seven years.

Southern comfort. Expansion has been the name of the game for the local tourism industry and that trend looks set to continue. Last year saw five million trips of the external and domestic variety. “Screen Tourism” has been helping to pull in overseas visitors. For example, the North American market expanded in 2018 by over one-fifth in just one year. Tourists from the Republic of Ireland are also heading North in their droves. Sterling weakness has helped increase trips from this market by almost one-quarter. Achieving the £1 billion visitor spend target by 2020 now looks like a slam dunk and could well come a year early.

High hopes. Some issues are lightning rods attracting society’s disquiet about the age. The decline of Britain’s high streets is one (we’ve even had ‘High Street Tsar’ Mary Portas try to reverse the decline). The truth is nuanced. From 2012-17, the number of businesses grew more slowly in Britain’s 7,000 high streets than elsewhere (15% vs. 22%). Retail firms and jobs fell. Yet 16% of us live there and between 2012-17 population growth was double non-high street areas (6% vs. 3%). And in every UK region/nation, jobs in food, drink and accommodation rose by at least 20%. Think change not decline as our high streets shift from the transitory and transactional towards the everyday and experiential.

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