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Saturday 8th April 2017
Hi Friend,
Strong growth continues in first quarter of the year ...
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Strong growth continued into the first quarter of the year according to the latest batch of economic news. The NIESR monthly estimate of GDP was released yesterday. Despite the apparent slowdown into March, the year on year comparison suggests GDP growth was over 2% in the first quarter.
Manufacturing data for February confirmed growth was 3.3% compared to prior year. We expect manufacturing growth in the first three months to be 2.9%. Strong growth, partly a statistical blip, for the year as a whole, we expect growth of 1.5% in 2017, compared to 0.8% last year.
The latest Markit/CIPS PMI data series were released for March. Manufacturing output and new orders continued to expand in the month. The headline index closed at 54.2 down from 54.5 in February, still well above the long term growth trend of 51.6. Price pressures remain "elevated" in March. The pressure on input and output prices continue.
The construction survey suggested weaker housing growth weighed on overall sentiment in the month. Despite a pick up in commercial activity, the headline index fell to 52.2 from 52.4. ONS construction data confirms growth slowed in February. The fall in public sector housing and infrastructure spending continue to offset the strong growth in private sector housing and commercial real estate.
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More economic news this week ...
The service sector continues to drive growth in the economy. Market/ CIPS data confirms the strongest rise in activity so far in 2017. The index closed at 55.0 from 53.3 prior month. Growth in new work continues but price pressures are increasing. The survey noted the strongest price pressures since 2008! Resilient demand is enabling cost pass through. Respondents also noted stronger salary pressures in the month, ahead of the April pay round.
UK
car sales increased by 8.4% in March. Private sales increased by 4.4%.
Fleet and business sales increased by 12%. 562,337 cars were registered
in the month, an all time high for the third month of the year. Sales
may have been boosted by the hike in Vehicle Excise Duty in April. The
SMMT remains cautious for the year as a whole.
House prices slowed in March according to the Halifax and Nationwide data. House prices in the three months to March increased by 3.8% compared to 5.1% in February according to The Halifax. Comparable figures for Nationwide were 3.5% and 4.5%. Evidence of a slowdown? Not really. Sooner or later house price increases must fall back towards the overall level of earnings growth. The affordability index can only be stretched so far.
The trade deficit (goods) increased in February to £12.5 billion from a revised £12.0 billion in January. We expect the deficit in the first quarter of the year to be over £36 billion compared to £32.3 billion last year. A deficit of £145 billion this year seems possible, up from £134 billion in 2016. The rise in service sector surplus will mitigate the overall net impact on the goods and services deficit.
Strong growth, rising inflation, salary pressures, trade deficits, base rates at 0.25%? Spot the odd one out. In the US job growth slowed in March. A disappointing 98,000 jobs were added compared to the 236,000 average in 2017. The unemployment rate fell to 4.5%. The Fed is still expected to raise rates at least twice this year. This week, MPC member Gertjan Vlieghe suggested UK rates could be on hold for another two years ...
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West Wing ... Whisky Tango Foxtrot ...
It has been another tough week for the President. Steve Bannon (Chief Strategist) was dropped from the National Security Council. General McMaster delivered the coup de grace. It could get worse. The President is considering sacking Steve Bannon and Reince Priebus as a West Wing feud continues.
Jared Kushner (son in law) and Steve Bannon appear to be locked in a White House power struggle. Ivanka née Trump will provide the running commentary into the Oval Office! The stakes are rising in the winner takes all game. Family first the guideline, Jared is odds on favourite to pull through.
Horrified by footage of victims of the gas strike in Syria, the President ordered the release of 59 Tomahawk missiles on the suspect airbase. An attack on the Assad regime, the missile strike is a reversal of White House policy and a shock to Congress. A clear warning to Syria and perhaps North Korea, the President has raised the stakes in international diplomacy. The rapprochement with Russia suffered a severe setback. The norm of Iranian alienation restored. Turkey, Saudi Arabia and Israel applauded the move. What next the key question. Weakening the Assad regime will boost the prospects of Isis and terrorism generally. Further measures are not excluded but options are limited without significant escalation of the confrontation with Russia.
President Xi was in Florida this week. Talks about trade and North Korea were expected. The visit has been subject to a virtual news black out. Agreed photo ops, the defined hand shake moment, a ban on Trump tweets during the visit perhaps, the Chinese delegation must have thought they had all the bases covered. Not so the Syrian airbase, a ban on missile attacks during President Xi's visit was omitted from the small print. "I haven't gotten much yet" joked the President in the early stages of the trip. A state visit to China later in the year the agreed outcome revealed!
"God Bless America and the whole world", the President closed his press statement on the Syrian strikes. Is the President now prepared to walk on the world stage with Tomahawk missiles in hand? Syria, Yemen, Afghanistan and North Korea should tremble, if the President gets a taste for action and the approval ratings respond. "God Bless America and 'Heaven' Help the Whole World" if that is the case.
That's all for this week from the West Wing Whisky Tango Foxtrot ...
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So what happened to Markets?
The Dow closed at 20,711 from 20,712. The FTSE closed at 7,349 from 7,322.
Sterling was down against the Dollar to $1.238 from $1.253 and was down against
the Euro to €1.168 from €1.172. The Euro moved down against the Dollar to 1.059 from 1.069.
Oil Price Brent Crude closed at $55.19 from $52.69 The average price in March last year was $41.58.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.07 from 1.12. US
Treasury yields moved down to 2.32 from 2.41. Gold closed up at $1,255 from $1,247.
John
That's all for this week. Don't miss our next economics update at PwC Manchester on the 18th May.
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