Chief Economist’s Weekly Brief – Bridging the divide

President Trump agreed a détente with President Jinping, bringing some respite from the ongoing trade war. It should provide some short-term relief to markets. But it’s premature to suggest a deal is a foregone conclusion 


Truce. The trade war has been impacting economic activity in recent quarters, clouding the global outlook. Meanwhile the threat of a further dose of tariffs on the remaining $300bn or so of Chinese exports to the US was looming. So markets were hoping for signs of progress between Presidents Jinping and Trump at the past weekend’s G20. They got their wish. Both agreed to resume talks and the US pledged not to put more tariffs on Chinese goods while negotiations continued. Time to breathe easy? Far from it. The risk remains that the respective positions prove intractable enough to prevent agreement. And all this represents is a brief reprieve in a lengthy economic war of attrition.

Incentive. China’s manufacturing sector remains in a fragile state. The official manufacturing PMI recorded its second successive month of contraction with June’s 49.4 reading a shade below expectations and matching May’s figure. The wait goes on for a rebound inspired by the substantial amount of stimulus seen in the past six months. The trade war isn’t the sole reason behind the softness in the sector (the genesis rests with last year’s efforts at curbing debt) but it’s one of them. The incentive on China’s part for a trade deal has always been that a trade war stands to impart more damage on their side.

Achilles heel. The UK current account deficit widened markedly in Q1 2019, up £6.5bn to £30bn. As a share of GDP that’s a yawning 5.6%, the highest since Q3 2016. Stockpiling ahead of the initial Brexit deadline of 31 March played a role, imports rose by a whopping £12.1bn over the quarter, with gold being a big reason. Even excluding this factor the current account was 3.6% of GDP, high by international standards.

Definitive steer. A no deal Brexit is more likely to extract “some stimulus” from the Bank of England, said Mark Carney in his testimony before the Treasury Select Committee. This stemmed from Governor’s concern over the adverse demand-side shock, particularly to business investment. While the shape and form remains unclear, Mr. Carney on a separate occasion mentioned that the scope of rate cuts was almost 0.75ppt, which would take base rate down to zero. That said, all MPC members maintained their formal position that rates could move in either direction depending on the final outcome.

Place apart. Foreign direct investment (FDI) into the UK fell to a six-year low in 2018/19. The number of projects dropped by 14% y/y and marked the second year of declines following 2016/17’s peak. The fall-off in investment was spread both geographically and across industrial sectors. At a regional level, however, Northern Ireland and the North West bucked the wider national trend with an increase in both new FDI projects and jobs. Over the last financial year Northern Ireland welcomed 35 new FDI projects, a rise of one-quarter on the previous year, with 1,475 new jobs. Clearly not all firms / sectors are being put off by Brexit.

The flow is slowing. It is often difficult to interpret headline population size numbers as they represent a result of four different processes, each of which depends on many factors. In the year to mid-2018 three factors: (1) births (-2%); (2)  deaths (+3%) and (3) emigration (+3%) – pointed to lower population. One, however, immigration (+10%), supported a larger population. The upshot is that the rise in population was the slowest pace in 14 years (+0.6%). The ageing population of the UK is projected to continue. By 2050 one in four people in the UK will be aged 65 years or over.

The only way is up. Northern Ireland matched the UK’s growth rate of 0.6% y/y with the population topping 1.882 million in 2018. Local births fell by over 2% to a twelve-year low but still comfortably outnumbered the recorded deaths (though not in North Down & Ards!). This ‘natural increase’ remains the primary driver of population growth. Net migration, which hit a decade high, remains significant. Immigration rose by almost 7% y/y while emigration fell by the same amount to a fourteen-year low. Not surprising given the strength of the labour market. A key challenge is the ageing population. The growth in the number of pensioners is rising at three times the rate of the population as a whole. By 2044, 1 in 4 people will be over 65yrs of age.

Broadening out.  The number of VAT and / or PAYE registered businesses operating in Northern Ireland rose for the fifth successive year, hitting 75,490 in 2019. Construction and agriculture posted the largest numerical gains, though there are still 15% fewer construction firms than a decade ago. Retailers have been disappearing with their numbers falling in nine of the last ten years.  Conversely, tourism and ICT have been major growth areas. The number of accommodation and food service businesses has jumped by 16% in four years. Even more impressive is the surge in information and communication. Firms in this sector have increased by one-third in five years and by over one-half in the last decade. The local business base continues to broaden but some sectors, notably retail, will continue to thin out.

Choppy. As millions start to head south for the summer, so does business optimism in the euro area. The Commission’s monthly survey of business sentiment fell again in June, to 0.17. It’s been falling continuously since January 2018, a time of maximum optimism for euro area firms, according to the survey. So 2018 may soon be viewed as a high point in the longer-term tide of economic performance. And this survey adds to growing evidence that the EZ’s economic waters are fast becoming less enticing, hence renewed chatter of further monetary and financial stimulus.

Stable. Euro area inflation flatlined in June, rising 1.2% y/y, matching market expectations. The core rate (excluding food & energy) rebounded to 1.2% in the year to June (0.9%y/y May) thanks largely to Easter timing effects. Still, underlying Euro inflation has averaged a lowly 1% over the last five years despite a steady decline in the unemployment rate and modestly higher wage growth. Of more concern has been the recent plunge in euro area market-based inflation expectations. No wonder ECB president Draghi opened the door for further opening of the monetary spigots in his latest speech in Sintra.

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