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Chief Economist's Weekly Briefing: Shifting Sands

By Royal Bank Of Scotland (RBS Economics Team )Market OverviewFeb 25, 2019 11:11
Chief Economist's Weekly Briefing: Shifting Sands
By Royal Bank Of Scotland (RBS Economics Team )   |  Feb 25, 2019 11:11
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The landscape for UK politics is changing. News that seven Labour MPs and four Conservative MPs have defected to form a new Independent Group highlights the current fragmented state of UK politics. PM May delayed the “meaningful” vote on Brexit to March 12th, adding to the uncertain picture for the UK economy, meanwhile the labour market powers ahead.

Robust. UK employment growth remains strong, chalking up another rise of 167,000 in the three months to December to just shy of 32.6 million, a fresh record. The unemployment rate was unchanged at 4% whilst average weekly earnings notched up 3.4% in the year to December, the highest rate since 2008. Combine that pay growth with falling inflation, now below 2%, and you get very solid real wage growth. A key support for the consumer in the midst of a lot of change.

Harder, better, faster, stronger? Hardly. Yet another year has passed without any productivity growth in the UK. In fact, output per hour worked actually fell 0.2% over the year to Q4 2018. The only reason the economy grew at all was because more people worked than ever before. Yet each worker now produces a mere 2% more than before the 2008 recession struck (whereas our American cousins are churning out 15% more every hour worked). Bad news is that the awful run is unlikely to let-up soon; both weak investment and slowing trade are likely to drag on productivity growth in 2019.

17yr low. January’s public sector finances revealed a record high surplus to the tune of £14.9bn, exceeding market expectations, and £5.6bn above levels of a year ago. Government borrowing in the first ten months of FY18/19 was £21.2bn, a 17yr low. Admittedly, January’s strong receipts were boosted by a £3.1bn rise in self-assessed income and capital gains revenues and February may yet disappoint. Still, the official forecast of £25.5bn for this fiscal year should be comfortably undershot. Good news for Chancellor Hammond ahead of the Spring statement, due on March 13th.

And the winner is? Four UK regions topped the table for labour market performance at the end of 2018 - the East of England, South West, Wales and Northern Ireland, with record highs in both employment levels and employment rates. The South West bagged the awards for highest employment rate (79.8%) and lowest economic activity rate (17.7%) for Q4 and narrowly missed out on the lowest unemployment rate. The South West was pipped by the East of England’s 2.8% - that’s almost half the rate in the North East (5.4%). Meanwhile, Wales saw a significant improvement. Its employment rate jumped from 72.6% to 76.2% in a year, moving Wales from tenth position to fourth.

Keep the creative fire burning. Will robots take our jobs? Absolutely not - reassured Andy Haldane, Bank of England’s Chief Economist, in his speech at Glasgow. But this had strings attached. We need to leverage the 2 I’s unique to humans – ideas driving innovation. More importantly, the change has to be carefully managed with social institutions to prevent the undesirable ‘I’ – inequality. To drive his point home, Haldane drew parallels between technology and domestication of fire - a boon for the human race, the destruction it caused (‘The Great Fire’) and institutions that sprang up to cope with it.

About turn. The minutes of the Federal Reserve meeting in January confirmed a shift from a tightening bias to a neutral stance. Rising uncertainty about the global economy, tighter financing conditions and muted US inflation were the main factors warranting a patient stance. Considerable discussion took place on the outlook on the Fed’s balance sheet; the committee hinted an announcement on ending balance sheet normalisation before year-end will be sooner rather than later. That means the Fed selling fewer bonds than it had previously intended, which should give the US more space to borrow.

Run down. Germany came within a whisker of a technical recession in the latter half of 2018 – contracting in Q3 and stagnating in Q4. But details last week revealed things aren’t quite as bad as that. A big decline in inventories drove the weak Q4 figure. That seems to be carmakers running down stocks after changes to emissions standards caused major disruptions to production earlier in the year. The rest of the domestic picture was much rosier. Consumer spending, capital investment and public spending all rose. More widely the Eurozone PMI edged up to 51.4 in February from 51.0 in January on stronger service sector activity. A bumpy end to 2018 looks to be giving way to a slightly improved early 2019.

"DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.

All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability. "

Disclaimer: This material is published by The Royal Bank of Scotland plc (“LON:RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited.

Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Group’s Group Economics Department, as of this date and are subject to change without notice.

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Chief Economist's Weekly Briefing: Shifting Sands

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Chief Economist's Weekly Briefing: Shifting Sands

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