Is it really all about stock building ...?
The UK economy grew by 1.8% in the first quarter of the year according to the latest data from the ONS. The growth was largely expected following the comments from the Bank of England Inflation report last week.
Service sector growth was up 2% with a strong performance from the leisure and distribution sectors. The Business and Finance sector expanded by just 0.9%. Government and other services were up by 1.2%.
Construction output increased by almost 3% year on year. The "Beast from the East" in 2018, provided an easy target to beat in the start to the new calendar year. Manufacturing output increased by 1.2%, compared to manufacturing growth of 0.9% in the whole of 2018.
So what of stock building? "Brexit stockpiling boosts economy (for now)" the headline in the Times today. "A deceptively strong start to the year" claims Howard Archer chief economic adviser to the EY Item club. "There was a major boost to first quarter growth as businesses looked to protect supplies in the event of a no-deal Brexit". Consumer stock piles of toilet roll may have helped expand GDP by as much as 0.7% in the quarter, the claim.
Ruth Gregory of Capital Economics is more sanguine. Stock building will have exacerbated the trade deficit. Any growth in stocks and output would have been offset be a deteriorating trade balance. The stock contribution to growth may have been as little as 0.1% as imports soared by 10% in the quarter. Export growth stalled up by just 1.5%.
The trade deficit accelerated to £17 billion in the first three months of the year. This compared to £24 billion in the whole of 2018. The £10 billion swing in the first three months of the year accounts for 0.5% of annual GDP and a not insignificant 2% of GDP in the quarter.
For the year as a whole, most economists are now penciling in a 1.5% expansion. Growth may moderate as fears for Brexit and Trade wars continue. Manufactures are exhausting working capital and storage space in the quest to second guess the next move on Brexit. Any reduction in stocks may hit output but would reverse the damage to the trade deficit in the first quarter. We expect growth to slow in line with the Bank of England forecasts. Yes we join the consensus this week.
The forecasts assume no further set backs on the Brexit story and some semblance of order in the White House approach to the trade conflicts with China ...
Trade Wars Escalate ...
"Your all time favorite President got tired of waiting for China to help out and start buying from our FARMERS!" tweeted Tariff Man Trump yesterday. "Tariffs will make our country much stronger. Just sit back and watch!"
The President hiked tariffs to 25% on an additional £200 billion dollars of imports from China this week. The impact will take four weeks to implement with every opportunity to secure a deal in the meantime. It doesn't seem likely given the drift between the two negotiating teams and the hard line approach from Beijing and Washington.
Two days of talks ended on Friday with no sign of agreement. The President continues to claim China will pay for the tariffs, much like Mexico will pay for the wall. This is a fabrication of course. The US Chamber of Commerce has made their views well known. Trade works, tariffs don't. American businesses and consumers are bearing the brunt of the global trade war, they say. "It is plain to see the tariffs are inflicting harm on the American economy. They will continue to do so unless the administration changes course. The US needs free and fair trade. Imposing tariffs to get there is the wrong approach."
US farmers are also unconvinced. In the Mid West, farm incomes have fallen, farm bankruptcies have increased. News from Washington of the next round of tariffs was another great setback to businesses, Businesses which had spent years developing markets in China are now seeing lucrative markets for soybeans and other crops disappear.
Despite the claims of the President, it is clear the American consumer is paying the price. The 20% tax on white goods has led to a 12% increase in retail prices for washing machines according to a study by economists at the Federal Reserve and the University of Chicago.
A tariff is a consumption tax. Americans will be paying higher prices on greater range of goods as a result of the President's policy. Farmers may be bankrupt before trade deals are secured.
Trump famously declared in March last year, "Trade Wars are good and easy to win". The President has yet to show he can strike a deal with China. Next up is Europe. Phillip Hammond warned this week, a further escalation of the trade wars would have serious consequences for Britain. If the President turns his attention to the trade deficit with Europe, the consequences will be all the greater.
Markets Feel the Pinch ...
Markets fell around the world as news of the tariffs and trade talks hit sentiment across all sectors. The Dow closed down 3% at 26,506. The FTSE closed down 180 points at just over 7,200. Our Nine index tracker fund was down by 3.4%. US stocks across the DOW, NASDAQ and S&P were down by 2.5% overall. Our European indices were down by 2.5%.
Markets in South East Asia fell by 5%. Worse hit was China falling by just over 5.5%. It could have been worse. Markets see sawed as news of the trade talks moved this way and that. Sterling fell against the Euro and the Dollar. Ten year bond yields slipped in the US and in the UK.
China is holding firm against pressure from the White House. It is also holding $1.3 trillion dollars of US debts. Should Beijing take a hard line on trade and ditch Uncle Sam's debt, the bond markets will see a big spike in US ten year yields. The all time favorite President may not be such a favorite after all.
That's all for this week, have a great weekend. We will be back with more news and updates next week!
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
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