Chief Economist’s Weekly Brief – Uncertain times

2019 was a year of heightened uncertainty. It was coming from the Brexit delays and negotiations, new resurgence in the trade wars and worsening global economic outlook. Locally, Northern Ireland notched up another year of Stormont in ‘cold storage’. 2020 has a busy brief locally, nationally and globally.

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Chief Economist’s Weekly Brief – Warming up

Governor of the Bank of England Mark Carney has been appointed United Nations Special Envoy for Climate Action and Finance (after his term ends on 31 January). Meanwhile European Central Bank President Lagarde is pushing for climate change to be part of a strategic review of its purpose. A need for public spending to assist the transition to net-zero emissions, and economies in need of spending to boost meagre growth. Hmmmm. Seems there might be a deal to be struck. Now we just need governments to warm to the idea.

Times, they are a changin’. Global trade is stagnating and is dragging down economic activity in almost all major economies. OECD’s downward revision of global growth forecast to 2.9% in 2020 is thus hardly surprising. Contrast that with 3.5% growth in 2018. Policy uncertainty is undermining investment and future jobs and incomes. The OECD’s prescription is structural reforms and bold public investment to raise long-term growth, such as spending on infrastructure to support digitalisation and climate change. However, large downward risks to future growth persist.

Past its peak? Q3’s labour market headlines suggested that the UK’s record breaking run is coming to an end. But some lesser spotted statistics are still revealing figures not seen before. Working households (where all adults work and ex. students) appear to have maxed out at 60% of all households. The proportion of workless households eased to a fresh low of 13.2%. Fewer than 1 in 11 children now live in households were no adults work. Again another record low. That compares with more than 1 in 10 at the last General Election and more than 1 in 6 when austerity began in 2010.

Sceptical.  A lot of promises of a brighter future have been made in this General Election campaign.  So far, the electorate appear unconvinced that these will lead to any real improvement in the economy.  The headline consumer confidence index refused to budge from a six year low of -14 in November.  It’s now almost four years since this measure was last in positive territory.  Consumers remain very downbeat on prospects for the general economy, but feel better when it comes to their personal finances, which should be enough to keep the tills ringing through the festive season.

Bargain hunting. Shoppers might be focused on the Black Friday / Cyber Monday sales but they’re hoovering up cheap deals in the mortgage market, too. Average interest rate on new mortgages in October was close to its all time low, coming in at 1.96%. That rate is just 4bps higher than the trough reached two years ago in October 2017. A lot has changed in that time, in particular the Bank of England base rate has been raised twice from 0.25% to 0.75%. As a result, 5% more people remortgaged last month, compared with a year ago, despite an otherwise slowing housing market. 

Two out of three ain’t bad. An increasing number of local households are availing of attractive interest rates whether to purchase a home or simply refinance to a better deal. Remortgage activity in Northern Ireland during the first nine-months of the year is up almost one-fifth relative to the same period in 2018. That compares with a 1% y/y decline for the UK market as a whole. Meanwhile with one-quarter of the year remaining, 2019 looks set to mark a 15-year high for the first-time buyer market.  The one segment of the local mortgage market not growing is loans for home-movers. The legacy of negative equity, or just lack of sufficient equity, has blighted this part of the market for the last decade.     

Add to basket. It should be no surprise to hear e-commerce sales have been on a tear. UK non-financial businesses have seen their sales rise from just over £500bn in 2016 to a little under £700bn in 2018, that’s about £1.9bn a day. And it’s been accelerating, 2018’s rise was the fastest since comparable records began in 2014. Naturally it’s taking up a larger share of firms’ turnover – 18.4% in 2018, up 1.8 pp from 2017. The larger the business, the more likely it is to make e-commerce sales (47% of businesses with 1,000 or more employees, compared with 12% to firms with sub-10 employees).

New arrivals. Many things have changed since June 2016. One of them is the attractiveness of the UK for EU citizens. Since 2016 UK net migration has been on a downward trend and in the year ending June 2019 an estimated 212,000 more people came to the UK than left, down from 311,000 in the year ending June 2016. Most of this reduction is due to falling EU net migration, while non-EU net migration continued its six-year trend of gradually increasing.  

Mildly encouraging. Euro area inflation moved up to 1.0% y/y in November compared to 0.7% y/y in October. The core rate also surprised on the upside in November, rising 1.3% y/y vs 1.1% y/y in October – the third consecutive monthly rise and a seven month high. All major components of inflation saw rises in the year to November, led by service sector prices. The exception was oil prices, which flat-lined. Still, with business confidence low, it is difficult to envisage a sustained build-up in price pressures in coming months. The ECB’s 2% inflation target is unlikely to be breached any time soon. 

Modest. Allaying some of the fears over a slowing US, growth for Q3 was revised up a notch to 2.1% compared to 1.9% as initially estimated. Consumer spending played a central role while monthly data for October showed it remained steady in the early part of Q4, growing 0.3% from the previous month. But decent spending and a still strong labour market are not putting upward pressure on prices. The Fed’s preferred measure of inflation rate remained at 1.6% y/y, lower than the target of 2%. Can momentum be sustained through Q4? It will depend on continued consumer resilience and whether tentative signs of business investment improving can be sustained. 

Chief Economist’s Weekly Brief – Oil shock

Attacks on two oil facilities in Saudi Arabia led to a 6% reduction in global oil supply and a 15% oil price spike within days. Saudi Arabian assurances that oil production levels will return to normal within weeks have been greeted sceptically. Meanwhile the Federal Reserve lowered the Fed Funds Rate by 25 basis points following a round of monetary easing by the ECB. Bank of England decided to save its firepower for later.

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