As the new Prime Minister prepares to enter Downing Street, he can draw some comfort from data indicating that consumers, buoyed by the strong labour market, are keeping the economy ticking over. But the new PM inherits a big ‘to do’ list, from resolving the Brexit impasse to addressing concerns over global growth prospects.
A rock of stability. Last week brought more good news from the labour market. Unemployment remains at a 44-year record low of 3.8% and, at 76%, the employment rate is just a notch lower than the all time high recorded last quarter. It is also welcome news that this tightness is feeding through to higher wages, which grew 3.6% over the past year; the fastest pace in more than a decade. In normal times, acceleration of pay growth would raise expectations of monetary policy tightening…. But we are not in normal times, and markets are pricing-in a Bank Rate cut later this year.
Still got it. With the labour market firing on all cylinders, British consumers just keep on spending. Retail sales volumes remain on a firmly upward trend, rising 1% m/m in June to leave them 3.8% higher than a year ago. Despite the unseasonably wet weather, sales grew across all sectors except department stores, which continue to suffer the effects of increased online competition.
The end of austerity? The race to be the UK’s next Prime Minister has seen the contenders trading spending promises and tax cuts. But the fiscal purse strings are already being loosened, judging by the first three months of tax year. The Government borrowed £4.5bn more between April and June than it did in the same period last year. Receipts were up, showing healthy growth of 3.1% as incomes and spending grow nicely. But that growth is dwarfed by a 5.9% rise in central government spending. Explaining how that has happened will probably be the new Chancellor’s first job.
Yes For Profit. A lot is happening in the economy these days so it is unsurprising that when 89 companies issued profit warnings in 2019 Q1, they cited reasons varying from low sales (35%) to delayed or discontinued contracts (20%), to EU exit (10%). Faced with weaker demand from Europe and China, manufacturers’ profits fell to 12.2% (from 14.3% in Q4). But servicers’ profits jumped to 19%; the largest quarterly increase since 2016. All in all, corporate profitability has kept its head above water.
Saturnine. UK house prices increased by a meagre 1.2 %( y/y) in May as prices in London fell by 4.4%; the steepest decline since the financial crisis. This appears to be driven by affordability as well as Brexit uncertainty: with the average house costing twice the UK average (£457k) London remains the most expensive region. The North West (3.4%) registered the strongest growth, followed by West Midlands (2.7%). Can a tight labour market turn the table on the slowing housing market
Tills Ringing. Manufacturing weakness and the ongoing US-China trade war are preying on policymakers’ minds, but US consumers appear to be brushing off such concerns. June’s retail sales figures went against the grain, with a 0.4% m/m rise double what was expected. Stripping out volatile items reveals an even brighter picture, with underlying sales climbing 0.7% last month. Americans clearly loosened the purse strings in June. But can they continue to support the world’s largest economy for long
June up. Chinese imports may have been soft in June but other economic data showed a decent end to Q2. Industrial production rose 6.3% y/y, up from 5% in May. Retail sales rose 9.8% y/y, up from 8.6% previously. Meanwhile fixed asset investment growth accelerated and credit growth was also a little stronger than expected. Is this the hoped for evidence of China’s stimulus finally stabilising the economy? It would be prudent to wait for more evidence; there were false dawns earlier this year.
Transparency. In his latest speech, Monetary Policy Committee (MPC) member Gertjan Vlieghe called for a more open approach to monetary policy by the Bank of England. He made the case for publishing regular forecasts for projected UK rates, drawing on the Federal Reserve’s experience with the “dot plot” and the approach taken by Norway’s central bank which publishes forecasts of its own decisions. This topic is especially pertinent at the moment as the US Federal Reserve’s forecasts are currently at odds with what markets expect. Typically rates rise gradually but fall swiftly when trouble arises, so central bankers very rarely say they expect to make big cuts to rates. Looking at changes in this area is likely to be a job for Mark Carney’s successor as Bank of England Governor.