Chief Economist’s Weekly Brief – Mario to Meatloaf: the honeymoon’s over

A return of Stormont provided a confidence boost. But the honeymoon appears to be over. New Decade New Approach said all the right things but will positive actions follow? Optimists hoped the approach of the new Executive would be akin to Mario Draghi’s “do whatever it takes” commitment in 2012 for public services and the economy. Instead local politics quickly turned into Meatloaf’s “but I won’t do that”. With red lines drawn, ruling out water charges, increases in tuition fees and revenue raising, it looks a lot like the old approach.


Nail-biting. A sharpish fall of 0.3% on the month means UK GDP is close to a standstill on the more usually presented quarterly basis. Total output grew by 0.1% in the three months to November 2019. The picture is a decent likeness to that initially sketched by the business surveys, with services lacklustre but just about growing (+0.1%), while production, pounded by both global and local winds, shrinking by 0.6%. We’re also well placed for a final year-end showdown. If December flatlines, then GDP will fall in Q4, the 2nd quarterly fall in three, finger pinchingly close to a recession. 

Out with a whimper. Consumers were the main contributors to UK economic growth last year, so December’s slump in retail sales is especially disappointing. The quantity bought in December was 0.6% lower than November, which itself was pretty weak. Sales in Q4 as a whole were down 1% on Q3, and we’ve now had 5 months without any growth. Only when you start making comparisons to 2018 does the picture get a little better, showing growth of 1.6%. Even the pace of growth online has cooled, but still managed to break the £2bn a week mark for the first time.

 Cut coming? Inflationary pressures eased unexpectedly in December with the UK’s CPI slipping to a three-year low of 1.3% y/y. The drop was driven by services, falling from 2.5% y/y in November to 2.1% y/y. This marked a 20-month low. On the other hand, consumer goods inflation stabilised at 0.6% y/y, although petrol prices are on the rise again. The fact that services inflation is easing suggests the economy is slowing. The BoE’s MPC are sharpening their interest rate cutting spears. A cut on 30th January – ‘Brexit Eve’ – looks a distinct possibility. Financial markets certainly think so.

 Two directions. Having cast off the shackles of austerity, Northern Ireland’s public sector continued to make a positive contribution to economic growth in Q3 last year. The public sector’s headcount notched up its fourth consecutive quarterly gain and is hiring at its fastest pace (+1.4% y/y) since the last recession. Brexit has helped on this front with 800-1,000 staff focussed solely on the issue. But growth in the public sector failed to offset a 0.3% q/q decline (0% y/y) in private sector output. As a result, Northern Ireland’s Composite Economic Index – the nearest thing we have to GDP – fell by 0.1% q/q (+0.3% y/y) in the third quarter last year. Surveys suggest Q4 will see another decline.

Not Great Expectations. The latest NI Chamber of Commerce & BDO survey for Q4 struck another sombre note. While there was some improvement relative to Q3, the overall theme was one of protracted weakness across most indicators. Cashflow remains “precarious” with weak trade performance within domestic and export markets. Manufacturing is faring worse than services with employment balances at 6-year lows and investment intentions heading back to recessionary levels. Only 1-in-4 firms expects the NI economy to grow in 2020, with the same number believing their business will contract. Key concerns flagged included Brexit, recession, skills shortages and the lack of a local Executive. At least the last of these has been removed.

Trade Talk. Everyone’s talking about the future of trade, be it global trade tensions escalation or UK’s trade agreements. In the 12 months to November 2019, UK’s trade deficit widened by £9.1bn to £36bn, driven mainly by the trade in goods deficit, which increased by £7.4bn to £143.9bn. The trade in goods deficit with the EU countries widened by £1.8bn to £23.9bn in the three months to November, while with non-EU countries it narrowed by £0.6 bn to £3.8 bn. Trade in services surplus has narrowed in the same period. Expect more trade blues with continued uncertainty over post-Brexit trade terms. 

The Nag’s Head. Del Boy’s local of choice might have struggled in recent years – 15k pubs (28% of the total) shuttered between 2002 and 2018, to number just 39k. But it’s “closing time” no more with the number of pubs estimated to have risen by 315 (0.8%) in 2019. Plus, while the number had been declining, turnover and employment held up (pubs and bars got bigger). Responding to shifting consumer tastes has also helped. People spend more of their household income on eating out and less on drinking out. No surprise then pubs and bars now employ more food severs than pint-pullers.

Signed and sealed. The phase 1 US/China trade deal was agreed last week. China pledged to boost US imports by $200bn over 2 years, focused on energy, agriculture and manufacturing. The US dropped China as a currency manipulator, but president Trump refused to roll back tariffs further until phase 2 is agreed. This is hardly surprising given the proximity of the US presidential election in November 2020. Structural issues, particularly Chinese subsidies for domestic firms, remain a bone of contention, pointing to continued uncertainty over the medium-term path for global trade.

Stable. Chinese Q4 GDP printed a 6% yoy rise, mirroring Q3’s performance. For 2019 as a whole, growth was 6.1%, down from 6.6% in 2018, a 29 year low. The bulk of growth last year was consumer spending (58% of GDP), investment contributed 31% with the remaining 11% in net exports.. The US/China phase 1 trade deal reduces downside growth risks near-term but the People’s Bank of China (PBOC) is unlikely to provide much stimulus due to ongoing fears of excessive leverage in some sectors,. Poor demographics and rising debt levels  and look set to constrain Chinese growth over the medium-term.

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