Chief Economist’s Weekly Brief – Turning point?

The latest output data for May showed a substantial rebound and raised hopes that we’ll avoid a contraction in UK GDP in Q2. Meanwhile expectations mount that US talk of cutting interest rates will turn to action by the end of the month.


Bounce back. In May UK GDP expanded by 0.3%, largely reversing April’s 0.4% decline. On a three-month rolling basis GDP increased by 0.3% in the period March to May, but this represents a slowdown compared to Q1 2019 due largely to an unwinding of the inventory-led rise in growth ahead of the anticipated EU exit on March 29th. Two main factors accounted for the rebound in May: (1) manufacturing (+1.4%) and (2) construction (0.6%) – both recovered from declines in April. All this suggests recent fears of a contraction in GDP in Q2 2019 should prove wide of the mark.

Deterioration. Business conditions took a turn for the worse across most UK regions according to the latest monthly PMI surveys. Only Wales, Scotland and the East reported faster rates of output growth in June. Subdued rates of growth and contraction were the key themes. Northern Ireland witnessed the steepest rates of decline in output, orders and jobs. A similar result was evident in the North East and the East Midlands whilst the Midlands (East & West) saw output fall at its fastest rate in over a decade. The one bright spot was rising employment in most UK regions, led by Yorkshire and Humber.

Come what may. The Bank of England’s latest Financial Stability Report (FSR) revealed its assessment that the balance of risks is broadly unchanged from November. Cooling consumer credit growth and a quiet housing market aren’t troubling policymakers. But it thinks there has been an increase in the likelihood of a no-deal Brexit, albeit firms and governments are now better prepared. Looking much further out, the Bank of England will stress test the banking system on the risks of different climate change scenarios in 2021.

Green with envy. You need to be an accounting nerd to make sense of the Irish GDP figures. Ignoring the China-esque headline GDP growth rate of over 6%, the Republic of Ireland’s economy is growing at an underlying pace of around 3% y/y in Q1. Nevertheless, this is still well above the corresponding rates of 1.8% and 1.2% for the UK and the Eurozone respectively. Like, both the UK and the Eurozone, however, Ireland’s economy is feeling the effects of slower global growth. The pace of expansion has eased from the impressive 4.5% growth rate last year. Brexit developments, particularly a no-deal scenario, are expected to lead to a further loss of momentum.

40,000. Last week’s Department for the Economy paper on the implications of a ‘no deal’ Brexit caused a media stir. Such an outcome would have a “profound and long lasting impact on Northern Ireland’s economy and society”. Attention focussed on the potential for a sharp increase in unemployment, with at least 40,000 jobs at risk, based on EU export exposure. By way of context, 41,640 jobs were lost in the last recession. A lot of what was presented was not new but rather a collation and an update of existing evidence. But with the risks of ‘no deal’ elevated, the same information is now attracting a much bigger audience than before.

Light at the end of the tunnel? With Brexit looming large, it would be premature to call an end to the UK housing market slowdown that has taken hold recently. Yet reports from surveyors are cautiously upbeat about the state of the market. In NI, whilst activity appeared to flatline in June, NI surveyors are the most likely in the UK to say that house prices are rising. And expectations that both sale prices and transactions volumes will be higher in 12 months are becoming increasingly common in the surveying community in the UK, including in Northern Ireland.

Generation rent. Housing costs are the most significant monthly outgoing. But as home-ownership is a minority sport for twenty and thirty somethings, rents matter most to them. Northern Ireland’s average monthly rent hit £616 in 2018 (£693 in Belfast)- a rise of 3.4% and almost a full percentage point above the annual rate of CPI. Most council areas posted rent rises below the annual cost of living increase. But Mid Ulster (+6.5%), Belfast (+5.4%) and Causeway Coast & Glens (+4.4%) recorded inflation busting gains. Upward pressure on rents is being supported by a squeeze on supply. Rental transactions have fallen in each of the last five years and by almost one-third since 2013. Enter ‘Build to Rent’ entrepreneurs?

Easing mode. Federal Reserve Chair Jay Powell’s latest semi-annual testimony before Congress was dovish, rubber stamping market expectations of a 25bp funds rate cut in July. Mr Powell highlighted “cross currents” facing the US economy, notably rising trade tensions and increased global growth concerns. He warned “there is a risk that low inflation will be even more persistent than we currently expect”. The minutes of the Fed’s June meeting revealed that “many participants” supported a “more accommodating” stance. The next move for US rates looks to be down.

Wrong way. It’s not the direction of travel that was hoped for. Well, for one side in the trade war at least. China’s trade surplus with the US reached its highest level of the year so far in June at $29.9bn. Imports from the US fell over 30%y/y while exports to the US were down 7.8%. It could be that the tariffs are hurting China’s domestic economy, putting a brake on imports. But the softness in the global economy will be a factor, too. Supply chains are global. Weaker export demand inevitably translates into weaker import demand as the need for raw materials and intermediate components diminishes.

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