Chief Economist’s Weekly Brief – New Decade, New Chancellor…New Approach?

Name the UK chancellor not to deliver a Budget? Sounds like a Trivial Pursuit question. Sajid Javid may be the first one in 50 years but he is not the only one. Javid’s six-and-a-half months in power did not see him deliver a fiscal set-piece. But he still fared better than Iain Macleod who took ill and died within a month of becoming Chancellor in 1970. Expectations have been raised for the new occupant of 11 Downing Street to embark on a fiscal stimulus.  The economy certainly needs a boost.

Out cold. As the bell sounded on 2019 the UK economy staggered against the ropes. Economic output was unchanged between Q3 and Q4. Even the trusty right hook of the UK consumer didn’t make an appearance with spending rising a mere 0.1%, the lowest in four years. There’s a hint that our fighter steadied herself. December’s monthly GDP reading showed a 0.3% rise in output (although it’s a volatile series). Business surveys so far this year suggest our fighter has come out swinging. But, in a final torturing of the analogy, the hard data in the coming months will confirm whether the punches landed.

Goodbye noughties. Often riding to the economic rescue, the mighty UK service sector seemed more shattered than superhero as the curtains closed on the noughties. Output in the sector rose by just 0.1% in Q4, taking the quarterly annual growth to a lacklustre 1.3%, a full percentage point slower than the decade average. Fittingly, it was technology and communications that made the largest contributions to recent growth. In grim contrast, production played the Christmas Grinch as manufacturing output fell a staggering 1.1% in Q4. And note for all these figures, things improved distinctly in December. Let’s hope it lasts.

Paused. No wonder UK economic growth has ground to a halt. Gross investment fell at an alarming rate in Q4, dropping 1.6%. Cutbacks were widespread, with businesses, households and government alike all reluctant to invest. Over 2019 as a whole, investment rose a meagre 0.4% vs. 2018 and is virtually unchanged since 2017. But all is not lost. Spurred on by a reduction in political uncertainty, businesses and households may yet press play on deferred investment decisions, while the newly appointed Chancellor is expected to use the upcoming Budget to give infrastructure spending a big boost.

Break for the Border. Households heading off for a half-term break abroad will be pleasantly surprised at the exchange rate. This time last year the pound was worth €1.15 making a euro worth around 87p. Last week saw sterling make significant gains moving from sub-€1.18 to over €1.20. Sterling is trading at levels last seen in late-June 2016. In the space of a week a euro has gone from almost 85p to 83p. The change of Chancellor helped fuel speculation the UK is set to embark upon a notable fiscal stimulus. The potential boost helped push sterling higher. But euro weakness is a major factor too with concerns over the Eurozone’s economic outlook weighing on sentiment. 

Generation rent. Almost three-quarters of people aged 65+ in England own their home outright. That watermark is looked at with envy by younger generations. Back in 1997, two-thirds of people in their mid-30s to mid-40s had a mortgage. Twenty years on that figure fell to 50%, with people in that age bracket now three times more likely to rent than in the late 1990s. For an increasing proportion of homeowners, getting on the property ladder later in life means paying off the mortgage in their 70s. For others, homeownership simply won’t happen. The greying of the private rental market will continue.

Optimistic. Renewed optimism from buyers and sellers led to a pick-up in house sales, according to the January RICS & Ulster Bank NI Residential Market Survey. Newly agreed sales rose for the first time since October as both new buyer enquiries and instructions to sell picked up according to surveyors. This refreshed optimism looks set to continue with sales anticipated to rise, both in the near term and for the year to come. Indeed, the three-month sales expectations balance is now at a 17-mth high. As sales activity improved though, house price pressures continue to build. The NI price balance moved to +56% which is the highest of the UK regions and a six-month high.

Better news. The second estimate of euro area and the EU GDP growth in Q4 confirmed it increased a mere 0.1%. But in better news it was revealed that the number of employed persons increased by 0.3% in the euro area and by 0.2% in the EU during the same period, accelerating from a 0.1% in both areas in the previous period and beating market expectations of 0.1%. On an annualised basis employment went up by 1.0% in euro area and by 0.9% in the EU. This was the first release of GDP and employment numbers in which EU does not include the UK – many more changes to come.

Risk management. Federal Reserve Chair Jay Powell’s latest semi-annual testimony was cautiously optimistic about the US economy. The current US recovery is the longest on record thanks to resilient consumer spending and a robust labour market. Mr Powell acknowledged potential downside risks from the coronavirus, but he stressed it was premature to draw conclusions. The Fed appears to be in no hurry to alter its current monetary stance. With limited room for lower US official rates, the onus is increasingly on fiscal policy to support the economy in the event of a downturn.

No pressure. US consumer price inflation edged a little higher in January, reaching 2.5% y/y. On a monthly basis prices rose 0.1%, helped by Rents and Clothes category. Core CPI, which strips out food and energy costs, increased by 0.2% monthly and 2.3% on yearly basis. Combined with a healthy but stable labour market, these figures suggest that there will be no immediate pressure for Fed to increase the rates any time soon.

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