Chief Economist’s Weekly Brief – Out

The UK has left the European Union. The transition period, during which the UK remains in both the single market and customs union, lasts until the end of the year, with trade negotiations set to start in March. In the background, the Bank of England kept Bank Rate unchanged, but lowered its forecast for the 2019 UK economy to 0.75%.

Flat. The Bank of England resisted the temptation to cut rates last week. What did change was the Bank’s view of how much growth the economy was capable of. After a poor end of 2019 growth is expected to dip to 0.75% this year, rising to only 1.5% in 2021. It takes until 2022 for inflation to recover to the MPC’s 2% target and productivity growth contributes an average of just 0.5% to the economy’s potential. Mindful of other economies, where inflation has proven stubbornly resistant to central bank’s attempts to boost it, the MPC will be investigating why price growth has been so low for so long. The results of that work will be for the new Governor, Andrew Bailey, to contemplate.

Plus ça change… Cautious relief was the key theme in January’s Decision Maker Panel survey result. The share of respondents who consider Brexit-related uncertainties as one of their top three risks declined to 45%, the lowest since Aug’18. Conversely, almost 3/5ths now expect uncertainties to linger beyond 2020, up from c.1/5th in Sep’19. And only half believe that transition arrangements would end in 2020. Excuse the cliché, but the Brexit saga is far from over.

Past its peak. Northern Ireland’s labour market continued to break records in the autumn months. But recruiters have been reporting a softening in the market.  While skills shortages persist and demand remains strong it is no longer the case of hiring on all cylinders. During the last quarter, the number of jobs listed on the website fell for the third consecutive quarter to a two-year low. Listed vacancies are down almost one-fifth relative to Q1 2019’s recruitment peak. IT continues to dominate the market and accounts for 1-in-10 of all advertised vacancies, though it has seen listings plunge by 40% y/y.

Divergence. Demand for commercial property in Northern Ireland fell for a third quarter in-a-row in Q4. That’s according to the latest RICS and Ulster Bank Commercial Property Market survey. Industrial units continued to see a rise in demand while interest in office accommodation was flat. Retail remains firmly in negative territory and this is dragging down the sector as a whole. Investment enquiries across all sectors fell in Q4 with the all-sector figure plumbing decade lows.  The good news is the outlook for 2020 looks significantly better. Following the general election and the resurrection of Stormont, sentiment amongst surveyors in the commercial property space is on the rise.  Just don’t mention retail!  

Low. Growth in the Euro Area slowed to just 0.1% in the final quarter of 2019, according to the preliminary flash estimates, falling short of forecasters’ expectations. The upshot is that the combined economy of the 19 member states grew by a meagre 1.2% over the course of the full year. The bloc’s second and third largest economies shrank unexpectedly, with output declining by 0.1% in France and 0.3% in Italy in Q4 amidst weakening domestic demand. Thank goodness for the likes of Spain, where the steady recovery continues uninterrupted, with 0.5% growth in the last quarter.

It’s working. Glacial doesn’t just mean slow, it also something imperceptible yet mighty. This neatly describes the trend in Eurozone unemployment, which fell again in December by a barely perceptible 0.1% m/m, to 7.4%. This relentless downward shift in unemployment, somewhat invariant to the economic cycle, is a reason for cheer. It suggests an important transition from a rigidly high unemployment system to something approaching the “Anglo-Saxon” model. An EU structural success. More than that, the differences between countries are narrowing too, with the gap between the top and bottom quarter falling from 3.4 pp in 2005 to 2.8 pp in 2019.

More stimulus please. Eurozone consumer price inflation accelerated for the third month running in January to 1.4% y/y. This marked a nine-month high, but remains well adrift of the ECB’s ‘close to but below 2%’ target. The pick-up in the headline rate was driven by more marked increases in food, energy, alcohol and tobacco. Stripping out these volatile items reveals a ‘core’ inflation rate of just 1.1% y/y. Interest rates are already on the floor and the ECB is pumping billions of euros into financial markets. Without a meaningful fiscal stimulus inflation looks destined to remain ‘close to but above 1%’.

Steady. As expected, the Federal Reserve left official rates unchanged last week. More interesting were comments on US inflation. The Fed now sees inflation “returning to” its 2% inflation target, not “near it”. Fed Chair Jay Powell signalled his determination to avoid global disinflationary pressures. The outcome of the current review of policy framework is due mid-2020. The Fed could target an average US inflation rate, allowing inflation to temporarily move above its 2% target following a prolonged period of below target inflation. If so, this would be a dovish signal.

Out of reach. The US economy chalked up annualised growth of 2.1% in Q4, or 2.3% for the whole of 2019. Not bad compared to what looks to be a little over 1% in the UK. But it’s short of President Trump’s aim of 3%. That aside, one slight concern was the (modest) loss of momentum in consumer spending. Cars, furniture, and in fact most categories of consumer spending, slowed. The corporate sector also showed reticence (trade war uncertainty), with spending falling 1.5% in Q4, delivering only 2.1% growth in 2019 after a 6.4% rise in 2018. 3 may be the magic number, but it looks unattainable.

“Software is eating the world” investor Marc Andreessen remarked way back in 2011. Well, it’s certainly eating up a greater share of private-sector investment in the US, about 14% in Q4 2019, up from 10% five years ago and way up on the 6% in the years leading up to the crisis. That comment was a reflection on the observation that more and more businesses and industries were being run on software and delivering their wares digitally. The evidence of that is all around us nine years on. Businesses in the world’s largest economy seem intent on doing plenty more of it.

Leave a Reply