Chief Economist’s Weekly Brief – Stagnating?

An unexpected decline in April GDP, driven by sharply weaker manufacturing activity, has increased the risks of UK growth stagnating, or even contracting, in Q2 2019. Still, continued favourable labour market conditions remain a key support for the resilient consumer, lessening the risks of a more pronounced downturn.


Hitting the brakes. UK GDP growth went into reverse in April as output fell by a thumping 0.4% compared to March. About half that contraction was due to scheduled shutdowns of automotive plants; car production shrank by 25%. Those plants should be back up to normal capacity after a few weeks, but other areas of weakness could be more durable. Unwinding the excess stocks built up ahead of the purported Brexit date could drag further. Let’s hope the UK’s economic engine splutters back into life in May.

Faster, higher, stronger. The current working age population have never experienced better UK labour market conditions. Employment is at record high 76.1%, the unemployment rate at 3.8% has not been lower since 1974 and inactivity rate at 20.8% is close to a record low. It is a similar story in Northern Ireland albeit our employment rate is lower and inactivity is higher. This labour market exuberance continues to push wages up: real weekly earnings have increased 1.5% versus last year. But many people do not realise how strong the labour market is. One possible explanation is that earnings are still below the maximum they reached in April 2008.

Capital growth returns. Only half of the twelve regions posted an expansion in output in May’s NatWest UK regional PMI survey. Yorkshire & Humber chalked up the fastest growth rate, displacing a slowing North West. Ten regions saw output growth either slow or contract last month. London was the biggest improvement, notching up its first increase in output, orders and jobs in 2019. London and Yorkshire & Humber were the only two regions to report faster growth rates for new orders. Outside of these two regions and Wales, new orders growth is either flat or falling. Challenging times lie ahead.

Stocking up. When it comes to Northern Ireland’s private sector output growth, manufacturing continues to do the heavy lifting. The latter saw output rise by 2.8% in Q1, four-times the pace of expansion within services. Stockpiling ahead of the 29th March Brexit deadline has flattered performance. Three sectors stand out with double-digit gains – both quarterly and annually. Chemicals & pharmaceutical products (think Randox, Norbrook & Almac) saw output jump by over one-quarter to a record high in Q1. Similarly the metals industry hit fresh highs with output up 18% q/q. The surge in textile products by almost one-third in just 12 months also suggests stockpiling is at play. Expect significant falls in Q2. What goes up can wind down!

Consumers feeling flat. Northern Ireland’s service sector started the first quarter of 2019 with a 0.4% drop in output. Although that was coming-off a ten-year high. More concerning is the annual pace of growth slowed to just 0.7%. That’s one-third the rate of expansion for the UK as a whole. Weakness within consumer sensitive sectors is a key factor here. Retail and hospitality fell by 1% q/q in Q1 and is down marginally on the corresponding period a year ago.  Despite a booming tourist industry, Northern Ireland has consistently underperformed against the national average in the retail and hospitality sector since 2009. This suggests a two-speed consumer market with a significant growth in visitors from outside Northern Ireland failing to compensate for lack of spending by indigenous consumers.

Detail is retail. Northern Ireland ended the first-quarter of 2019 the same way as the previous two years – with record employment.  Employee jobs have been on the rise for the last thirteen quarters, hitting 778,240 in Q1. This job rich recovery has seen 87k jobs created in seven years since the post-downturn trough. That’s up one-eighth. Unfortunately low wage / low productivity job gains continue to outpace the higher value variety. Residential care activities accounted for 15% of the net gain in jobs – more than any other sub-sector. An ageing population is boosting demand and this trend will continue. Conversely, retail jobs are on the wane. As of Q1 2019, they are 5% lower than their peak nine years ago and falling. This trend also looks set to continue.

At your service. The UK trade deficit widened £2.7bn to £15.6bn in the three months to April 2019, driven by higher imports of goods from non-EU countries, mostly the US. Exclude the erratic subcomponents, the trade deficit would have narrowed during this period. Exports of goods have played a role too, increasing by £1.4bn – a sizeable percentage is in works of art. Trade in services has fallen, hampered by the invisible barriers that restrict financial and travel services. As the knowledge economy builds, will we see a shift in trade dynamics?

Not all that shine is gold. Beating market expectations, Chinese trade data showed an overall surplus of $42 billion in May. Exports increased by 1.1% in dollar terms compared with last year but imports dropped by 8.5% (y/y), the largest decline since July 2016. The rise in exports was mainly due to front-loading as exporters tried to fill orders, taking advantage of lower rates. Escalating US/China trade tensions, higher tariffs and weak global demand pose a downside risk to exports in the coming months. In other words, not a great time for there to be domestic weakness, too.

Stimulus trigger?  Expectations have been building that another bout of Chinese stimulus is on the way, given the unexceptional impacts of easing measures to date. May’s data likely strengthens the case. Industrial production grew at 5%y/y, which might sound a lot but it was the weakest in 17years. Fixed-asset investment growth slipped from 6.1%y/y to 5.6%. Retail sales provided some better news with growth accelerating to 8.6%y/y after April’s 16-year low of 7.2%. Still, the “tremendous room” to adjust policy that China’s central bank governor has talked of may best be readied.

Tame. Further benign inflation data added to the recent clamour for the Federal Reserve to begin easing sooner rather than later. The annual rate edged down to 1.7% in May, from 1.8% in April. The core rate, which strips out the more volatile items of food and energy, fell from 2.1% to 2% – the joint lowest rate since February 2018. Price pressures have eased despite continued tight labour markets, providing room for manoeuvre for the Fed to respond to downside risks to the US economy. Some think there’s already a case for cuts. But strong retail sales data last week show’s there’s life in the US consumer. The Fed can still afford to be patient.

Car worries. Eurozone industrial production fell by 0.5% between March and April, echoing, albeit quietly, the plummeting 2.7% dive evident in the UK. Yet that echo is far louder among some member states. Take Germany, where production dropped by 2.3%. This suggests two, possibly three, things. First, manufacturing weakness is not confined to the UK. Second, car production has been hit particularly hard, hurting Germany and the UK. And the third? UK’s idiosyncratic circumstances, namely Brexit, is a character in this drama, it’s just not the sole protagonist.

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