Chief Economist’s Weekly Brief – And they’re off!

The 2019 General Election is officially underway, with politicians of all colours off in search of votes.  At stake is not only the future of Brexit but of fiscal policy, our response to climate change and more besides.  The UK economy looks pale and weak in contrast to the frenzy of activity amongst would-be-MPs.  Business surveys suggest that output stagnated in October, while the Bank of England downgraded it’s growth forecasts, prompting two Monetary Policy Committee members to vote in favour of an immediate 0.25% rate cut. 


Dissent.  What a difference a few months make.  Two Monetary Policy Committee (MPC) members, Michael Saunders and Jonathan Haskel, surprisingly voted for a 0.25% Bank Rate cut last week.  The rest supported leaving policy on hold; the first MPC split since June 2018.  The Bank of England’s Monetary Policy Report (formerly the Inflation Report) is cautious about the UK economic outlook, shaving it’s medium-term growth forecasts due to increased Brexit-related uncertainty and weaker global demand.  Consumer spending is expected to remain resilient but the outlook for investment remains clouded by uncertainty. Still, the BoE’s probability of a UK recession in 2020 dropped to around 20%, from 30% three months ago.

Feeling flat.  The UK economy remains distinctly off colour according to the latest PMI health check.  Last month the private sector notched up its third successive fall in activity; something not seen for 10½ years. Granted, the scale of current declines is modest relative to 2009.  October’s all-sector PMI reading of 49.5 was only marginally below the expansion threshold of 50.  The services sector performed best, with activity remaining flat.  Meanwhile, manufacturing’s rate of contraction was modest.  Not so for construction, where activity fell at a rapid clip (44.2).  Given that construction continues to report the steepest decline in new orders, they will be eager for a fiscal stimulus to provide a much needed boost. 

More of the same. October’s PMI survey for Northern Ireland’s private sector was a familiar story. Output, orders and employment all fell once again relative to the previous month. While positives are in short supply,there were some. Manufacturing returned to growth for the first time in six months and services firms posted their first rise in staffing levels of 2019. Context is key here however. These improvements are coming off multi-year or even decade lows. Meanwhile the rate of decline amongst retailers and construction firms accelerated further last month. Looking ahead, it is difficult to come to any conclusion other than to expect more of the same in the coming months.

Green to amber. Deceleration is the name of the game for the Republic of Ireland’s economy. While October marked the 79th consecutive month of private sector growth, the all-sector PMI’s rate of expansion (50.5) was the weakest since May 2013.  Service activity has slowed markedly with last month’s reading of 50.6 marking an 87-mth low. That was below manufacturing which saw a return to growth for the first time in five months. Construction remains in the red with activity contracting for the second month running and at its fastest rate in close to six-and-a-half years. The Republic’s private sector may not have hit a red light yet as far as growth is concerned. But it does look as if it has hit amber.

Re-writing the rulebook.  Those hoping for a public spending bonanza may not be disappointed.  Chancellor, Sajid Javid, has re-written his fiscal rules to allow a future Conservative government to borrow up to 3% of GDP to invest (potentially worth £22bn a year).  Labour would go much further still, pledging £55bn more capital spending per year; enough to double public investment, even before spending on nationalisation plans is factored-in.  Both Parties argue that their proposals are sustainable, pointing to promises to balance the current budget (in the future) and cap debt interest payments.  But whoever wins the election, the national debt looks set to soar.

International shipping solutions. Chinese exports declined for the third straight month in October, falling 0.9% from the same month in 2018.  Yes tariffs are hurting, but so too is the weakest pace of global growth since the crisis.  At least there was some news that may herald better times ahead.  The US and China appear to be moving toward a truce, or a “phase one” agreement.  It’s a short-term market positive and supportive of economic forecasters pencilling in a better 2020 (not to mention Presidents seeking re-election!).  But is it little more than a sticking plaster for some fundamental disagreements?

Cautious Start.  Christine Lagarde had defended ECB monetary policy and called out Germany and Netherlands for their budgetary policies less than a week ago.  However, in her first speech as ECB president, she avoided touching any such controversial topic.  While few expect her to deviate from the current course, she steered clear of discussions on monetary policy.  Her decision to speak in Germany and to honour Wolfgang Schaeuble, a key ECB critic, in her speech indicate willingness to work collaboratively with all sides.

Decarbonising. According to recent polls, a majority of the public want the UK to have net-zero emissions by 2030; 20 years earlier than the government target.  Between 1990 and 2018, greenhouse gas (GHG) emissions intensity for the UK fell by two-thirds.  During the same period GHG emissions intensity of the energy supply industry fell by 69% and acid rain precursor emissions intensity, by 88%.  Only four European countries (Sweden, France, Luxembourg and Austria) reported lower GHG emissions intensity.  Now, to approach net-zero emission by 2030 we only have to increase the average rate of decarbonisation 5-fold…

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