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Saturday 27th May 2017
Hi Friend,
Economy grows by 2% in first quarter ...
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The economy grew by 2% in the first quarter of the year compared to 1.8% in 2016. Household expenditure was up by 2.6%, investment spending increased by 2.2%. Government spending was up by just 0.8% as the austerity policy continues. Domestic Demand overall was up by 2.3% compared to 1.5% last year.
Is this a sign of an economy radically slowing? Not really. The consumer is not yet demonstrating any real income squeeze. The overall performance of the economy is impacted by government austerity and poor trade figures. The external deficit will create a serious challenge to a lax monetary policy eventually. Sterling moved down this week to $1.28 as the Tory lead fell to just 5%.
The trade balance deteriorated. Imports increased by 4.3% and exports increased by just 2.1%. The deficit increased to almost £12 billion (current values) in the quarter. That's 2.4% of GDP. The chained volume measure is much worse. The deficit increased to £16.5 billion, a heady 3.5% of GDP. In current prices the economy grew by 4.4% to a level of almost £500 billion. Base rates on the floor at 0.25% with strong growth and a widening trade deficit. It just doesn't make sense.
Sensing trouble ahead perhaps, foreign workers are heading home. Net migration fell to just 248,000 in the final quarter of the year. EU citizens are leaving. 117,000 departed, a rise of 31,000 compared to the prior year. The government is committed to reducing immigration to "tens of thousands" at a time of full employment in the economy. The damage to industry and the higher education industry in particular will be significant.
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In other news this week ...
Pause for thought at the G7 meetings. The Prime Minister has implemented a U-Turn on welfare policy. The strong and stable Prime Minister has proved to be unstable under fire. The about turn on the budget and now the manifesto have clearly placed the Tory campaign under pressure.
The lead in the polls has slumped to just five per cent. Whitehall is mugging up on the Labour manifesto just in case. Could there be another vote shock following Brexit and Trump? Jeremy Corbyn in Number Ten? What then for Sterling and migration?
The April borrowing figures were released this week. The good news, borrowing fell to £48.7 billion in the financial year 2016/17 slightly better than first estimated. Not so good, Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016; this is the highest April borrowing since 2014. Public sector net debt (excluding public sector banks) was £1,722.4 billion at the end of April 2017, equivalent to 86.0% of gross domestic product (GDP). The OBR is forecasting a deficit of £58 billion this year. No real shock in the April numbers.
In the US, growth in the first quarter was up by 2% in the first quarter. Growth of around 2.4% remains possible in 2017. The Fed may act to hike rates next month, one of two rises expected this year. In the UK growth of between 2.0% and 2.4% remains a possibility. As the spread against the Fed widens and the UK deficit deteriorates, the Old Lady may have to act to keep pace the with Janet Yellen.
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Let's here it for the rainbow tour ...
Let's here it for the rainbow tour,
It's been an incredible success,
We had our doubts, we weren't quite sure,
But the answer is yes, Trump avoided a mess ...
Or did he?
It started well in Saudi. Posters on the way from the airport featuring Trump flattered the ego. A trade deal and arms deal gave the President an easy win. General agreement the Iranians are the bad guys, part of an axis of evil with, along with North Korea, the Germans and the Democratic Party assisted the visit. So much for peace prospects in the Middle East as the Sunni - Shiite schism is confirmed.
No clangers about civil rights and the rights of women, the President was on his best behaviour. The Saudis had their fun. Trump took part in a traditional dance with men, clutching swords. All caught on camera. Later he was seen clasping an orb to open the Global Centre for Combating Extremist Ideology. King Salman of Saudi Arabia and Egyptian President Abdel Fattah el-Sisi played along, clearly enjoying the irony. How they must have tickled their ribs in Riyadh after he had gone. Melania refused to hold hands and no wonder.
Israel next. The secret service were not to pleased about sharing data with the Russians. No mention of the embassy move to Jerusalem. Trump vowed to bring peace to the Middle East and to resolve the Israeli Palestine conflict on his next trip. How difficult can that be? A visit to the wailing wall. Trump posted a message, presumably asking for a quote for the Southern Border.
As with the Evita trip, things started to go wrong in Italy. Bad news from Rome, he met with the Pope. The Pope made some remark about the President's weight, suggesting he had been eating too much cake. Trump received a book on climate change as a gift from the Pope and a diet tip sheet. The President promised to read the Papal Missives later but not before he arrived in Brussels.
NATO and the G7 visits didn't go well. Trump asked NATO countries to stump up and pay their dues. Trump acts like the membership manager at the Mar-A-Lago country club, collecting overdue fees and bar tabs. We can't be sure he gets this NATO thing at all. The good news, Trump asked the members of NATO to spend more on defence (and U.S. weapons systems in particular). More resources should be committed to the fight against terrorism, who can argue with that. The President was all too vague on the commitment to Article 5. The important bit about NATO, were we all stand together in the face of a common enemy like Russia!
Nothing was to stand in Trump's way, including the Prime Minister of Montenegro. In a great cringe-worthy moment, Trump shoved Montenegrin leader Dusko Markovic to the side, pushing to the front of the pack to preen for a photo-op. The battle of the handshakes became of critical press concern as President Macron got the upper hand, clearly well briefed on the Trump Push-You-Pull-You-Welcome technique.
Trump trashed Germany in a meeting with EU leaders on Thursday "The Germans are bad, really bad. Look at the millions of cars they sell in the U.S." White House economic advisor Gary Cohn was forced to explain the president doesn't consider one of America oldest and closest allies to be "bad" It is simply their trade policy, based on world-class highly competitive manufacturing exports (and a manipulated currency!).
No commitment to the Paris accord and the climate change agreement, the President headed home "job done". Good cop in the Middle East, bad cop in Europe, allies bewildered, the Saudis were thrilled.
Back to the U.S. the White House staff face the Mueller "special investigation" and the prospect of huge legal fees, innocent or guilty. A staff reshuffle in prospect, the President is hiring legal counsel to vet his tweets. Imagine that a lawyer confining his comments to just 140 characters. Tough hire ...
That's all for this week from The West Wing, Whisky, Tango, Foxtrot ... You can check out the series of blog posts here or leave any comments or LIKES on the Facebook page here ...
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So what happened to Markets?
Traders were spooked as the Tory lead closed to just five points. Sterling fell, the dollar rallied and markets hit new highs. The Dow closed up at 21,082 from 20,832. The FTSE closed up at 7,547 from 7,470.
Sterling was down against the Dollar to $1.280 from $1.304 and was down against
the Euro to €1.144 from €1.1636. The Euro moved down against the Dollar to 1.118 from 1.121.
Oil Price Brent Crude closed at $51.96 from $53.60. The average price in May last year was $46.74.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.01 from 1.10. US
Treasury yields held at 2.25 from 2.25. Gold closed at $1,280 from $1,251.
John
That's all for this week. Our Economics Forecasts for May will be released at the end of next week, following the second estimate of GDP last week.
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