Economic Insights – Monday 25th April

Headlines

  • Global economy: pulse rate down again everywhere
  • UK and US consumers may not be doing enough
  • ECB still strutting and fretting without effect
  • Brexit: Obama charm and Boris boorishness help but economists turn the tide for the Remainians.

 

Chart 1 Contributions to year-on-year volume and value growth in the UK from the 4 main retail sectors (March 2016 compared with March 2015)

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Source: ONS

Economics: slower still and slower

A big data week lies ahead for most major economies apart from China, which as usual has already won the monthly competition to produce the quickest and most optimistic numbers.

For once, I shall give pride of place to the UK although not much good news is in prospect. The first (and incomplete) cut of Q1 GDP will hinge on the data displayed in Charts 1 and 2 from the Office of National Statistics. Consumers are still buying cheerfully but at lower prices and less so in shops while the Services sector (including retailing) is currently the only likely source of overall growth. The consensus expectation is for Q1 to be +0.4% quarter on quarter (vs. + 0.6% in Q4) but I reckon it could be as low as +0.3%. Other ‘highlights’ are likely to include another dismal CBI Survey of Industrial Orders and Gfk Consumer Confidence slipping below zero. Mortgage lending, however, will have surged in March, which is just what we do not need!

Chart 2 UK GDP contribution to the quarter-on-quarter % change, Quarter 4 (Oct to Dec) 2015

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Source: ONS

The US also reports on Q1 GDP (together with a raft of numbers for the month of March) and here too +0.3% is also very likely but with the crucial difference that this would be on an annualised basis. This is the latest reading from the Atlanta Fed Nowcast, which has become a very accurate predictor of first cuts of GDP but it has to be said that US GDP is notoriously reported lower in Q1 than in the rest of the year. The Cleveland Fed also have a Nowcast of their own and it forecasts a modest fall in March to 1.5% year on year in the FOMC’s preferred inflation gauge of the Core Personal Consumption Price Index. As in the UK, Consumption is key to future growth and the two major surveys of Consumer Confidence, the Conference Board and Thomson Reuters/University of Michigan, are also due out this week. As both have been (gently) trending in opposite directions, a dramatic improvement seems improbable with inevitable implications for overall growth in the US economy in Q2 and beyond.

It seems tactful not to dwell on expectations of the data from Japan but the numbers will include CPI, Industrial Production, Household Spending and Retail Sales. Judging by the smoke signals with regard to the Bank of Japan’s pushing interest rates into negative territory, we should expect nothing but further gloom.

Chart 3 EZ banks neither borrowers nor lenders

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While listening to Mr Draghi’s press conference some lines from Macbeth did come to mind but I have since reserved them for another ‘performer’ (see below). However, as we all celebrate the anniversary of Shakespeare’s death (also his birthday, by the way) I thought an allusion to Hamlet would be appropriate in the caption for Chart 3. Essentially, EZ banks are not lending much to businesses or consumers and prefer buying sovereign bonds with what little of the ECB’s funding largesse they elect graciously to accept.

Nevertheless, Mr Draghi did manifest some ‘sound and fury’ on Thursday as clearly German politicians, not least Finance Minister Schaüble, are vexing him on at least three fronts: (1) blaming ECB policies for the rise of anti-EU protest parties (2) insisting on austerity instead of moderately expansionary fiscal policies and (3) daring to challenge ECB independence (supremacy?) just because zero interest rates do not suit the domestic German banking sector.How long will it be before Mr Draghi blames the politicians for the lack of lending that  means there is little prospect of much growth in the next year and beyond? This week should bring another set of poor data headed by persistently low inflation and high unemployment. No lending means very little growth and data from the EZ this week should report more of the same: persistently low inflation and high unemployment. Spain should have the best story to tell with Germany and France lagging some way behind while Italy still struggles with high unemployment, low wages and, of course, a host of migrants from Libya.

Mr Schaüble has also been stirring up trouble in suggesting that Greece may not need debt relief, as now demanded by the IMF, if it would only try harder to meet its deficit targets. However, the latest exercise in can-kicking requires Greece to agree to an extra €3.6bn of ‘contingency savings’ to hit the 2016 deficit targets just in case the previously imposed €5.4bn is not enough. Hubble bubble, toil and trouble but probably not just yet, during the Brexit referendum campaign!

Chart 4 Brexit rises to top of concerns in April’s BAML global investor survey

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Brexit: two-handed economists to the rescue

Investors have been getting increasingly alarmed by the prospect that a grand alliance of romanticists, genuine reactionaries, anarchists and the merely bloody-minded might win the day on June 23rd. UK equities and the pound have been hit and Chart 4 shows how Brexit since January has overtaken a hard landing in China and a US slowdown as the chief concern of respondents to the monthly BofA Merrill Lynch survey of global investors.

The latest betting implies the probability of Remain winning has jumped to 75% after last week’s wobble and the last few days may yet prove to be the turning point. President Obama may have been at his most charming (also with flashes of ruthlessness) but the heavy lifting had already been done by economists, of all people. The fact is that it is impossible to construct a realistic case that the UK would be better off economically outside the EU. In contrast, as with the Scottish Independence referendum, a political case can be made provided one is willing to pay a short-term price and risk longer-term damage. The best one can say (as Lord Merv of Swerve did last week) is it would not make much difference but even that requires, awkwardly, some sort of new deal with the EU. The crux of the matter is that trade just cannot be ignored, no matter how loudly the Leavers complain about the three models (Norway, Canada and the World Trade Organisation) set out by the Treasury and even their own ‘Albanian’ model requires something on trade.

Here I want to make a plug for the Centre for European Reform (CER) who describe themselves as ‘an independent think-tank devoted to making the EU work better, and strengthening its role in the world. We are pro-European but not uncritical.’ Indeed, the CER regularly publishes learned papers on both EU reform and Brexit. Regular readers will know just how much I sympathise with such sentiments and that I am a proud ‘Remainian’ as Share Radio’s Simon Rose described me as I set off last Thursday to a CER-sponsored debate on the motion that ‘Leaving the UK would damage the UK economy’. The debate was preceded by Gordon Brown in as good form as I have ever heard him (and I have known him since we were undergraduates), who made a brave attempt to inject some passion into the Remain camp but, as the FT’s Janan Ganesh keeps pointing out, it is really all about economics. Proposing the motion were JP Morgan’s Stephanie Flanders and the FT’s Martin Wolf while opposing were Capital Economics’ Roger Bootle and Gerald Lyons from the Mayor of London’s office. As Mr Wolf observed with uncharacteristic generosity, Messrs Bootle and Lyons are two of the few serious economists in the Leave camp, which made their overwhelming defeat all the more significant. Chart 5 sets out the voting from the audience of academic, business and journalist economists. I might add I have rarely come across such a strong consensus amongst so many economists, despite all of them appearing to be of the two-handed variety famously reviled by President Harry Truman.

Chart 5 CER Economists debate: the Remainians have it!

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The political debate will go on but it all seems so unnecessary unless one actively wishes to change the leadership of the Tory Party. At least Michael Gove is a romanticist given leave of absence from reality by his friend the Prime Minister but others have less respectable aims. For the erudite but shameless Boris Johnson and in honour of the Bard’s anniversary I address this passage from Macbeth (after I had looked for something from Comedy of Errors)

…a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

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