Not for the first time, it appears inflation is making a bit of nuisance of itself. There was more evidence last week that the consumer is feeling the squeeze and its having a knock-on effect for growth.
Slower, part 1. Britain's economy grew by 0.3% in Q1, down from 0.7% in Q4 2016. Weaker growth was caused mainly by a fall of 0.5% in the output of the retail and accommodation services sectors. If there's such a thing as a good slowdown this was it. Higher inflation is squeezing incomes leaving people with a choice: run down their savings and borrow so as to sustain consumption or tighten their belts. These numbers suggest we've done the latter.
Slower, part 2. Growth also slowed in the US. The 0.7% annualised (0.2%q/q) there is calculated differently from in the UK and represents next to no growth at all. However, there's a lingering suspicion about the quality of the US growth data. We buy more ice cream in summer than winter and spend more on Christmas crackers in December than June. Many economic statistics are adjusted to even out these fluctuations. For several years, reported US growth has been markedly slower in in Q1 compared to others. Is first quarter growth being understated? Perhaps but even if that's true growth was still slow.
Hesitant. “Now-casting”, the ability to gauge the current state of the economy, may be in vogue, but old fashioned methods like consumer confidence surveys are doing a fine job of reading the economic mood music. April’s GfK survey shows that while sentiment remains steady, despite rising price and financial pressures, households are starting to feel slightly less sure of the outlook for both the economy as well as their own finances. They are thus more hesitant in their high street spending, something confirmed in the official retail sales and GDP figures. Saving is starting to look more attractive, too. And some would say that’s both timely and welcome.
At last? A ray of hope for aspiring home-owners. Annual house price growth slipped to 2.6%y/y in April according to Nationwide – the lowest in four years and a halving since last summer. Remarkably….well, not so remarkable for the UK’s housing market, it’s still outpacing wage growth. Post the election on 8 June, aspiring home-owners will be looking for a dose of radical reform to fix the UK housing market. Will it be side-stepped or faced head on?
Gravity. Data from the British Bankers Association shows the demand for mortgages easing in March. The big high-street lenders approved precisely 74,447 mortgages in March, down from 76,426 in February and a bumper 77,759 in March 2016. In many ways this is simply an inevitable response to natural forces, in particular the gravitational force of high house prices and poor affordability. That, and the fact that last year’s numbers were inflated by the rush to beat the rise in stamp duty on second properties. Despite the slowdown in price growth, the price of a typical house reached a record £207,699 in April – over seven times the median wage.
Rising tide. The richest fifth of UK households had pre-tax income of £84,700 last year, 12 times that of the poorest fifth who received just £7,200. Yet this ratio is actually an improvement on last years 14-fold difference between these groups. The reason for the improvement? More jobs. The amount received in wages and salaries for those in the bottom fifth rose by 20% as more households found work. The flip side to those higher earnings was higher taxes (mainly National Insurance) and lower tax credits. But those same taxes ensure a more even income distribution. After all the taxes and benefits are taken into account the ratio of incomes between the top and bottom quintiles falls to 3.7, the lowest since 1985.
Deceptive deficit. Last (tax) year the defict reached its lowest level since 2007 at a ‘mere’ 2.6% of GDP, suggesting the the job of fiscal austerity is roughly three quarters done (the deficit peaked at 9.9% in 2009). But unfortunately that conclusion is premature. Last year’s tax receipts were boosted by a particularly strong corporation tax take, which would normally be a good thing, but is largely due to companies bringing forward profits ahead of change to dividend taxation introduced in April. Resultantly, the OBR expects the deficit to rise to 2.9% of GDP this year. Developments in the deficit have been deceptive.
Hand of history. The European Central Bank left rates and its bond-buying programme unchanged at last week’s meeting. As usual the post-announcement press conference was parsed for hints of upcoming policy changes. President Draghi is a little more enthusiastic about the region’s growth but still sees risks “tilted to the downside” (due to global factors) and inflation pressures that are too weak to contemplate paring back stimulus. He also possibly has the Bank’s history in mind. Six years ago this month the previous President, Jean-Claude Trichet, raised rates as the region was slipping into crisis. The lesson? Monetary tightening in the eurozone is best done later rather than sooner.
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