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Saturday 11th February 2017
Hi Friend,
How strong will growth be in 2017 ...
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The Bank of England set the pace, forecasting growth in 2017. In the February Inflation Report, the growth forecast for 2017 was upgraded to 2.0%. Earlier in the month, we boosted our expectations of growth this year to 2.0% with an upside of 2.4%.
Expect a whole range of updates from the HMT (Treasury) panel in the week ahead. In the "Forecasts for the UK economy" January edition, the average forecast for the year was just 1.3%. Just three panelists, Liverpool Macro, Beacon and Deutsche Bank had predictions of growth over 2%. Their estimates ranged from 2.4% to 2.6%.
To be fair, the publication date of the January edition was ahead of the ONS preliminary estimate of GDP growth in Q4 2016. Strong growth recorded in Q4 will form the basis of growth in 2017. The next HMT Forecast update is due next week. The forecasts will reflect the latest ONS data. The average projection in 2017 will be in line with the Bank estimate, with an upside potential of 2.4%. This is in line with our own estimates for the year ahead, as explained to a full house, at our quarterly economics presentation last week.
So what of inflation? The February NIESR Economic Prospects arrived this morning. NIESR expect inflation to average 3.3% in 2017 with a growth forecast of just 1.7%. How high will inflation rise if growth is higher? We expect inflation to spike in the first quarter this year. The January CPI data, out next week, will push the headline rate over 2%. The Governor would have us believe the next rate move could be up or down. Really? As growth forecasts increase, markets will be conditioned to accept a series of rate rises in 2017. The Bank should move to normalize rates. Growth will be strong in 2017. The next rate move is up. It could be as early as April ...
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Economic news this week ...
The ONS released the December data on trade, production and construction this week. The strong finish to the year was confirmed. The trade deficit narrowed to just £3.3 billion in the month, down from £3.6 billion in November. Manufacturing output increased along with construction growth! Is the economy rebalancing at long last?
Manufacturing output increased by 1.2% in December 2016, compared to December last year. For the year as a whole, manufacturing output was up by just 0.6%. We expect growth of just 1% in 2017. Construction output was up by 1.8% compared to November. For the year as whole, construction was up by 1.5%. Strong growth in private sector housing and commercial real estate was offset by weakness in public sector spending on housing and infrastructure. So what of 2017. The construction data is remarkably volatile. The pattern of spending will continue into 2017. Private sector strength will continue in the year ahead. Government spending will be limited. We expect little or no growth in construction this year.
Is the economy rebalancing? The trade deficit in the final quarter of the year was £8.6 billion compared to £5.9 billion in Q4 2015. For the year as a whole, the deficit, trade in goods, was £134.9 billion compared to £120 billion prior year. That's almost 7.5% of GDP. So much for rebalancing and depreciation of Sterling! There is little or no trade in goods benefit from the depreciation of Sterling as we have long explained.
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West Wing ... Whisky Tango Foxtrot ...
For lovers of the "West Wing", there can be no better drama than events unfolding in The White House, as we explained last week. This week, the President had a difficult call with Francois Hollande, President of France. The call to Angela Merkel, currency manipulator, with a big trade surplus with the U.S. didn't go down too well either. It was a week of setback and readjustment for President Trump.
Nordstrom dropped Ivanka's fashion line. The outraged President Twittered his disdain. Worst still the Muslim ban (it's not a ban) ran into trouble. A federal appeals court upheld a ruling suspending President Trump's controversial immigration order. The executive order would have barred refugees and citizens from seven Muslim countries, (without a Trump hotel), from entering the U.S.
"SEE YOU IN COURT" tweeted the President. Reminiscent of the early morning wake up call for Pandora Maxwell. "I am about to call the police" said Mrs Maxwell, as detectives called to arrest her husband. Madam "we are the police" the reply. So in the White House, See you in Court, tweeted Trump. Mr President "We are the courts" the obvious reply ... and we voted 3.0 as Hillary Clinton explained via Twitter of course.
"Mad Dog" Mattis was out soothing nerves in Japan and South Korea last week. The adults are arriving in the West Wing in force. Steve Bannon is under lock and key. The President is playing golf in Mar-a-Lago this weekend with Shinzō Abe, the Prime Minister of Japan. They will fly together on Air Force One, despite the currency rigging. The charm offensive begins. The President is coming to terms with the reality of office and the "Realtik" of international relations.
Trump made the telephone call to China this week. Confirming to President Xi Jinping his commitment to the "One China" policy. Never really in doubt! Taiwan a crossed line! Mere conicidence, China had indicated a slow down in U.S. bond purchases this month. Ah yes, running the U.S and the world may be a little more difficult than expected. West Wing ... Whisky Tango Foxtrot ...
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So what happened to Markets?
Markets, were up the Dow closed at 20,262 from 20,057. The FTSE closed at 7,258 from 7,188.
Sterling was steady against the Dollar at $1.250 from $1.252 and down against
the Euro to €1.174 from €1.161. The Euro moved down against the Dollar at 1.065 from 1.078.
Oil Price Brent Crude closed at $56.76 from $56.78 The average price in January last year was $32.18.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.27 from 1.36. US
Treasury yields slipped to 2.42 from 2.44. Gold closed at $1,233 from
$1,218
John
That's all for this week. Don't miss the pro-manchester Business Conference in March. We focus on Digital Disruption and the Smart City Challenge. Sponsors Samsung will be demonstrating the latest in virtual rally, plus we have the latest on robotics, AI and autonomous vehicles.
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