The EU granted the UK a further extension of Article 50, effectively pushing out the cliff edge to the end of October. Meanwhile, latest UK data was mildly reassuring, consistent with continued sluggish growth in early 2019.
Mind the gap. Slightly surprising this, but welcome nonetheless, the UK economy grew by a more than respectable 0.2% in February. This runs counter to recent business surveys and confounded the consensus, which had largely expected the economy to flatline. Recall UK GDP rose by 0.5% in January too. So, barring a major mishap (and what could possible happen?), the UK is almost certainly cruising to record decent quarterly growth in Q1 this year.
Services strength. The heavy weight services sector, which accounts for the largest proportion of UK GDP, maintained its strong position, growing 0.4% in the three months to February 2019. The largest contribution came from real estate related activities, followed by computer programming. Close on the heels, industrial production rose 0.2%, led by broad-based increases within the manufacturing sector. Admittedly, some of the rise could have come from Brexit-related hoarding, judging from latest trade and PMI releases. But for now, the spotlight seems to be back on the Bank of England as the economy remains resilient despite deep political uncertainty.
Slowdown contagion. Almost all UK regions reported either slower rates of growth or a fall in business activity in March according to the latest NatWest regional PMI survey. Six out of twelve regions posted a contraction: London, Northern Ireland and the North East were at the bottom of the rankings for both output and employment. Firms in the North West experienced the strongest rates of growth in business activity and the joint-fastest rate of job creation alongside the West Midlands. Wales topped the regional league table for new orders growth for the second month running and was one of only four regions to record growth in new business. Looking ahead, the East Midlands is the most optimistic, Northern Ireland the least.
Putting away for a rainy day. The total UK trade deficit in the three months to February widened by £5.5bn as deficit in goods increased and was partially offset by a surplus in services. Goods import increased by £4.9bn as manufacturers resorted to Brexit stockpiling. On the other hand, global slowdown along with Brexit uncertainties and volatility in pound drove down the goods export, imports from the E.U. increased by 7% y/y. Notably, exports to the E.U. rose by 8% above their 2018 average level in February, showing that firms on the other side have also started planning for a no-deal Brexit.
Cooling down. According to the IMF’s latest World Economic Outlook global growth started to slow in the second half of 2018 and is forecast to slow to 3.3% in 2019 compared to healthy rates of 3.8% and 3.6% respectively in 2017 and 2018, the fastest since 2012. The main culprits are fading US fiscal stimulus, slowing Chinese growth and weaker Eurozone activity. Medium-term global growth is expected to plateau at 3.6%, supported by the rising importance of Indian and Chinese economies, but slow productivity growth and population ageing looks set to keep growth modest in advanced economise. Risks to the global economic outlook are viewed on the downside.
Out of kilter. When it comes to what drives trade imbalances between countries, new IMF analysis shows that macroeconomic forces – like fiscal policy and the strength of demand relative to supply-side capacity – play a far more important role than tariffs. No wonder really; tariffs are already at low levels in many countries. In a comment seemingly directed at President Trump’s trade policy, the IMF warn that targeting particular bilateral trade balances (e.g. US-China) only leads to trade diversion and offsetting changes in balances with other countries, while tariff hikes would harm productivity and leave the global economy worse off.
Taming the superstars. Everyone loves a winner, but great innovation is often followed by great market power. The IMF’s latest research grappled with this topic, showing that markups over marginal cost – a proxy for market power – have risen by 8% in advanced economies in the last 15 years. Those rises are concentrated in industries that make most use of digital technology and are thus more susceptible to dynamics where the winner takes most of the spoils. As a result, those companies with the highest mark-ups (the top decile firms) increased their margins by over 30%, versus a negligible increase in the rest of the corporate population. The IMF’s conclusion? Competition policy needs to change to keep up with the digital age.
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."