 Earnings Rise ...
Profits at Joules, the premium fashion brand increased by almost 15 per cent in the six months to late November. A reminder it's not all gloom and doom on the high street. Don't get too excited, the company warned it expected conditions in the retail sector to remain "tough for the foreseeable future". Tough but a rise in household incomes will help. In the three months to November, earnings increased by 3.4% compared to the same period last year. Inflation is falling, real incomes are rising. The unemployment rate held at 4%. There were 1.37 million unemployed with over 850,000 vacancies on offer. Recruitment difficulties are increasing as growth continues. The IMF expects growth of 1.5% in the UK in the current year compared to 1.3% in Germany and 1.5% in France. The small matter of Brexit is a huge overhang on the performance of the UK economy. Confusion in Westminster doesn't help. Borrowing increases ... Government borrowing in December was £3.0 billion compared to £2.7 billion prior year. Over the first nine months of the year, borrowing was £36 billion compared to £49 billion prior year. In the current year we now expect borrowing to hit £30 billion compared to £42 billion last year. A significant improvement on prior year but well ahead of the latest forecasts from the Office of Budget Responsibility. Total debt at the end of the year was £1.8 trillion. With 27% of gilts held overseas, dependence on the "Kindness of Strangers" continues. "With rotten bonds and inky blots sustained". Government revenues in the month increased by 4.3% as a result of higher VAT and NI contributions. Expenditure increased by 5.3% as the spending cap is eased on public sector pay and welfare payments. Gross interest payments in the month were £4.0 billion bringing the total for the year to date to £40 billion. The interest rate bill for the year as a whole will be £52 billion compared to £37.4 billion we plan to spend on defense. This week, Sony announced a relocation to Holland, Airbus warned the wings will fly in the event of a no deal solution. Dyson announced a relocation to Singapore. The UK is no place to build electric cars apparently. The Prime Minister suggested trade talks had gone well with New Zealand. There may even be hopes of an invisible link in the chain, with the CPTPP. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership the full name. Think of TPP deal without the US. It all sounded great until the Australian trade Minister pointed out the UK is a long way from the Pacific ... and it is ... IMF issues warning ... Christine Lagarde issued a warning to the world this week. Brexit and trade tariffs are a threat to growth. Who would have thought ... The IMF reduced forecasts for world growth this year to 3.5% from 3.7%. In the USA growth is expected to fall to 2.5% from 2.9% in 2018. In China, growth is expected to fall to 6.2% from 6.6% in 2018. . Should we really be so worried about China? For all of 2018, the Chinese economy grew 6.6 per cent, in line with a government target for growth of “about 6.5 per cent”. The growth rate was down from 6.8 per cent in 2017 and was the lowest growth rate since 1990. The Chinese economy slowed further in the fourth quarter, matching the lowest recorded reading, last seeen during the global financial crisis in 2009. The fourth quarter growth rate of 6.4 per cent, year on year, matched that of the first quarter of 2009, according to data released Monday by the National Bureau of Statistics. Retail sales grew 8.2 per cent December compared to a year earlier, up from 8.1 per cent in November. . China retail sales exceeded the total value of US sales for the first time ever. Industrial output increased by 6% as investment increased by a similar level. China is the second largest economy in the world and will surpass the US with the next five to ten years. The economy is morphing, manufacturing is on the move. Rumors this week, the high end iPhone will move out of China, to India. Just one of the many reasons why, the IMF expects the Indian economy to expand by 7.5% this year. The iPhone may be on the move but China hegemony remains the call ... The Writing's on the wall ... In the US, the shut down is over. Trump backed down in the face of Democrat solidarity and a crumbling Republican redoubt. The President agreed to end the shut down without any commitment to money for his great wall. Nancy Pelosi held her nerve as support for the President fell. Chuck Schumer had ensured Trump would take ownership of the shut down. The public held the President to account. The writing is on the wall for the President. In a sense it had been since the results of the mid terms. It was the second set back of the week for Trump. The Leader of Congress had suggested the President should not deliver the "State of The Union" address until the shut down was over, concerns over security paramount. When the President announced he would probably pop in any how, Pelosi formally withdrew the invitation. The President was stymied. The leader of the free world, was forced to accept he could only deliver his SOTU, once the shut down was over. By the end of the week, it was. Trump delivered a rambling, incoherent, "ode to the wall" packed with inaccuracies and falsehoods. For a President consumed with winning, this was a "stinging defeat" according to the New York Times. The White House team now have three weeks to manufacture a face saving deal with the Democrats. It will not be easy. Best to avoid the Press Room for now. Trump has instructed Sarah Huckabee Sanders "not to bother" with the press briefings ... there seems little point! In other news this week, the Mueller investigation continues. Roger Stone a long time Trump friend and adviser, has been indicted. Accused of lying, obstruction and witness tampering in the investigations of Russian involvement in the election of 2016. "I am innocent and will never rat on the President" claimed Stone. "This has nothing to do with the President" explained Sarah Sanders! Yep somehow we have heard this all before! That's all for this week, have a great week-end. We will be back with more news and updates next week! John
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 Inflation falls ...
Inflation fell in December to 2.1% from 2.3% prior month. Service sector inflation held at 2.4%. The fall in the headline rate was largely attributed to goods inflation, down to 1.8%. A drop in petrol prices assisted the move, reflecting the continued weakness in oil prices. Oil prices Brent Crude averaged $57 dollars compared to $64 dollars last year. Manufacturing output prices slowed to 2.5% from 3.0% in November. Input costs slowed to 3.7% from 5.3% prior month. Softer petroleum prices helped but the weakness of Sterling $1.27 v $1.34 in December 2019, offset some of the gain. For the year as a whole, most analysts now expect inflation to average around 2.3%. Good news for households as earnings are expected to rise by around 3% maintaining a positive outlook for real earnings. Good news also for the Bank of England. There will be little pressure on the MPC to raise rates during the current year if current trends are maintained. Not so good for Sterling as the Fed is expected to raise rates by a further 50 basis points through the year. The interest rate differential will push the dollar higher and Sterling lower despite the rally this week. Retail Sales Slow ... Despite all the fears for retail sales over Christmas, the official figures from the ONS suggest sales values increased by almost 4% as volumes increased by 3.0%. Headlines from the High Street must be kept in perspective. Online sales increased by 14% accounting for 20% of all retail sales. Department stores, clothing and footwear are particularly vulnerable to on line penetration. The pressure on high street infrastructure will continue forcing store rationalization and footprint contraction. The pattern of sales is changing. Imagine a time within the next five years when 25% of transactions will be online. A huge extraction of activity on the high street and in shopping malls. Who can remember the idea of January Sales. New Year Discounts yielded to Boxing Day Breaks. Blue Star and Blue Tick Deals appeared in the run up to Christmas. Then came Black days on line. The significance of December no longer the dominant feature of the final quarter. Profit warnings prevail as a result of Brexit prevarication. Shock news from "Build a Bear" this week. Fluffy toy sales fell and workshop activity waned as "unresolved issues relating to Brexit negatively impacted consumer confidence". Those two year old toddlers so fickle in the face of EU uncertainty. Brexit Confusion Continues... The May deal vote was expected to fall at the first fence. The size of defeat was a shock to all. 432 MPs voted against the proposal. The Government was defeated by an unprecedented 230 votes. The Conservative party was in tatters with both sides of the Brexit debate voting against the deal. Decisive leadership was required to restore party unity. Jeremy Corbyn obliged calling a vote of no confidence in the government. Tory whips just flicked the feather duster to guarantee support, with the backing of the DUP of course. If the Labour leader has a strategy it remains well cloaked. The confidence vote provided a welcome delay for the Prime Minister in an attempt to find a solution to the current impasse. Welcome relief as rebel ranks rallied behind the weary front bench, Sterling rallied closing at $1.2894 by the end of the week. A postponement of the March deadline a possibility. A revised deal to include the Single Market and the Customs Union now a probability. It is clear a Conservative Party so divided, cannot deliver a solution to the quandary. A cross party agreement is the solution. If only Corbyn would abandon the illusion of a possible snap election and a move into Number Ten, then real progress could be made perhaps. Boris Johnson was in Stafford this week, delivering a potential leadership speech at the JCB factory. Digging a hole in front of a digger, the would be leader of the party denied any suggestion he had mentioned Turkey and the potential 77 million immigrants from the East prior to the Brexit vote. According to Henry Zeffman in the Times today, Johnson in 2016 had said, "I cannot imagine a situation in which 77 million of my fellow Turks can come here without any checks at all." Pressed by Channel 4 news, Johnson said "I didn't make any remarks about Turkey, mate". Yep fake news ... mate ... U.S. Shut Down Continues ... In the US, the partial Fed shut down continues. Pelosi denied access to the House for the President's State of the Union address. Trump retaliated by denying the leader of the house access to the official flight for an impending trip to Afghanistan. "If you would like to make your journey by flying commercial that would certainly be your prerogative" he wrote. Here's hoping the Taliban don't have access to the timetables from Washington to Kabul any time soon. Federal flights were later denied to all government staff. The First Lady was able to sneak out on an early flight to Florida. There have to be exceptions to every rule of course. Pelosi decided to cancel the trip to the war zone. The leader of the house is second in line to the presidency after all. Trump made the best of the shut down and the in house catering crisis this week. Paying out of his own pocket for a candlelit supper of junk food, the President entertained the Clemson Tigers, the 2018 college play off champions. Trump ordered 300 hamburgers quickly escalating to a claim of 1000 by the time the press arrived. Salads prepared by the First Lady had been an option. The "Melania Melange" could have become a Washington delicacy. The photo op no way as appealing as the shot of the leader of the free world in front of all that junk food. Plus he gets to eat the left overs. Markets rallied this week as China offered serious concessions to avoid a trade war. More pigs and soy beans will be added to the buy list. China promised to eliminate the trade deficit with Uncle Sam within five years. The US had a trade deficit with China of $323 billion dollars in 2018. That's a lot of soy and hog wash ... That's all for this week, have a great week-end. We will be back with more news and updates next week! John  Growth in the final quarter of 2018 is expected to be around 1.4% based on the latest data from the ONS. 1.4% is now our forecast for the year as a whole with a similar level of output expected in 2019.
Service sector remains the driver of growth in the absence of investment and public sector expenditure expansion. And what of manufacturing? For the final quarter of the year we expect manufacturing output to fall by around 1% compared to heady growth of 2.5% in the first quarter of the year. Something is happening in the sector as domestic demand slows, Brexit fears rise and world trade activity slows. "Tariff Man" Trump continues to wreak havoc with threats of more trade tariffs. Grim news from the motor trade this week as Ford and Jaguar Land Rover both announced job cuts. The axe hovers over Bentley as losses continue and parent patience wears thin. UK Car sales fell by 7% in 2018. Declines were equally experienced in private and business registrations. Diesel sales fell by over 30%. The good news, petrol sales increased by 9% and alternative fuel sales were up by 21%. Diesel cars were the main problem for the sector. Customer confusion, government regulation and supply side issues the main challenge in a difficult year. Consumer confidence and Brexit are in the mix for problems in the sector but are not the whole story. JLR was hit by a slump in sales in China and the decline in diesel sales. A resolution of trade with Europe is critical for the car market and many other manufacturing sectors in the UK, as the SMMT has long argued. The Japanese Prime Minister Shinzo Abe was in Downing Street this week ... explaining the significance of European trade to Nissan, Toyota and others from the East ... Brexit Deal Nears ... Perhaps a Brexit deal nears? It could be next week. May's deal will be put to the vote on Tuesday. It is expected to fall at this first fence. The Prime Minister will have a second chance on Friday to put an amended deal to the House. The amended deal could include a commitment to match Labour Regulation and Conditions within the EU, appealing to dissident remainers in the Labour Party. A compromise on the Single Market and the Customs Union would appeal to Remainers in the Tory Party. The DUP and the Northern Ireland issue would no longer require a backstop. Forget the ERG and Tory Europhobes. Those ladies are not for turning. Job done the vote would pass, no need to postpone the Article 50 deadline at the end of March. No need either for a second referendum or a general election. A Bloomberg survey this week of eleven international banks attaches a 35% probability to a deal passing at the second time of asking and just a 15% chance of a no deal as the final outcome. The fortunes of Sterling are included in the poll survey. The upside, Sterling trades at $1.35 with a $1.15 downside as a result of no deal. The Sterling Friday close was $1.2852. $1.30 to $1.20 is the tighter band. $1.32 our call on a Friday deal resolution. The prospects for truly global Britain will be enhanced by remaining within the single market and the customs union. Truly global Britain, the invisible chain around the world, will experience a trade deficit in goods of around £140 billion or 7% of GDP in 2018 and 2019. The deficit will be largely offset by a surplus in invisible goods. The shortage of capacity in the manufacturing sector will be exacerbated unless the trade deal with Europe is achieved. Germany remains the exemplar of what be achieved in export growth within the so called restrictive EU trade tariff regime. Germany exports four times as much as the UK to the BRIC and North American markets. U.S. Shut Down Continues ... In the US, the partial Fed shut down continues as Trump obstinacy is maintained. Money for the wall or no money for 800,000 Fed workers the trade off. Pelosi and Schumer have boxed in the President. Trump owns the shut down. The GOP will feel more uncomfortable as the impasse moves into a fourth week with no signs of a walk back from the White House. Fed Chair Jerome Powell assured markets there will be no recession in the USA this year. Steve Mnuchin US Secretary of the Treasury has already assured investors there is no liquidity crisis in the Banking Sector. Markets have moved from the December lows, no doubt taking the President's advice to "Calm down and enjoy the ride". No recession, no banking crisis. Just an emerging balance of payments and debt crisis to emerge as the economy enjoys continued growth into 2019. Uncle Sam is in danger of losing the AAA rating for borrowing as Fitch explained this month. A continued shut down without an expansion of the debt ceiling will create problems for the US economy later in the year. James McCormack, Fitch's head of Global sovereign Ratings at Fitch, warned debt levels are moving higher and the debt service costs are increasing. The Dollar closed lower against the Euro and the Pound. US Ten Year Bond Yields closed up to 2.70. China is set to become the largest economy in the world within ten years. The Renminbi is set to become a reserve currency within the same time frame. Uncle Sam may need a wall to keep people in as the reality of the Trump economics unwinds in the years ahead ... That's all for this week, have a great week-end. We will be back with more news and updates next week! John  Happy New Year...
I would like to wish everyone a happy New Year with best wishes for 2019. I hope you all had a great break. We are back in our eighth year of the Saturday Economist with great plans for the year ahead ... Brexit Looms ... Just ten days to go to the critical vote in the Commons, eighty three days to go before the Brexit deadline. Government plans are advancing at pace. Chris Grayling, Transport Secretary is on the case. Grayling has awarded a £14 million pound contract to Seaborne Freight to boost capacity across the Channel. The company has no experience of running ferry transport. It owns no ferries either. Seaborne Freight is a start up with a paste up website. Terms and Conditions were scraped from a takeaway restaurant apparently. Customers were advised to check "before agreeing to pay for any meal". When challenged Grayling said he would make "no apologies for supporting a new British venture"; Well no apologies for anything apparently. The British Army has been put on standby alert. Riots in the street will be ignored as troops deliver essential food and medicines around the country. The troops will solve the riddle of last mile delivery perhaps, shooting down Amazon drones in the process. The Foreign Office has hacked out a new role for truly global Britain. In a key speech at the end of October, Jeremy Hunt, Foreign Secretary explained how we can become "the invisible chain that links the world's democracies". Things must be bad. The thin red line has become an invisible chain, "as strong and resilient as it needs to be, as new nations rise and the world order is challenged anew". Oh yes and Hunt explained we will have a better telephone network. "When I arrived at the Foreign Office, we had secure phone connections to the US, Australia, Canada and New Zealand. I have now added Japan, France and Germany to the list." Excellent. Unsecured lines everywhere else? Some things are better left unsaid. Just weeks to go. The May deal looks set to founder. Tory grass roots don't like the deal. Neither does the Parliamentary Party. The outcome is becoming clear. Something will happen. Nothing will happen. There will be a variant of the two. Who said planning for Brexit was difficult ... Pelosi takes control ... In the USA the Democrats have taken control of Congress. Nancy Pelosi is now the Speaker of the House of Representatives. Together with Chuck Schumer, Democrat leader in the Senate, Pelosi will present considerable obstacles to Donald Trump's White House ambitions. Alexandra Pelosi warns "My mother is a force to be reckoned with in negotiations. She will cut your head off and you won't even know you're bleeding". Trump is already struggling, the predictable, so easily out manoeuvred. The US government is in partial shut down as Trump demands money for his wall. Actually it's not a wall. It is a barrier made from steel slats, beautiful American steel slats with a see through facility which is safer because "we can see who is trying to get in". Forced into a corner, the President can only react in one way. He is threatening to maintain the shut down for months or even years unless he gets the money. Actually it's not a shut down! The President would prefer to think of it as a "strike". Workers (mainly Democrats) refusing to work without pay in the face of intractable opposition to his plans, from elected representatives (mainly Democrats). The adults are leaving the White House. Mattis was due to leave at the end of February. Fox news explained the resignation letter to the President wasn't flattering. Trump decided to fire the General with immediate effect. Rex Tillerson "Dumb as a rock", General McChrystal "Big Dumb Mouth" have already taken flak. More on Mattis (A Democrat) will follow. Trump's decision to quite Syria, a place of only "death and sand" has been rolled back. Troop levels in Afghanistan, a place were the "Taliban fights Isis", will be maintained for the moment. Who needs Generals anyway. "I could have been a great General, who knows?" explained the President. The situation will deteriorate as the Mueller investigation is given an extended life and threats of impeachment gather momentum. As we write the President is threatening to declare a National Emergency to get his way and his wall (not a wall but slats with slits) ... Markets rally as jobs boom ... Markets suffered a turbulent period at end of year. The Dow, NASDAQ and S&P closed lower end of year. Trump blamed the Federal Reserve, refusing to accept tariffs and tantrums had played any part in the turmoil. "The Fed is like a powerful golfer who can't score because he has no touch, he can't putt". An interesting and novel perspective on monetary policy failed to reassure investors. Markets had become very gloomy with fears of a slow down in the USA in 2019. Jack Ablin, Chief Investment Officer at Cresset Wealth Advisors put matters into perspective. "I don't mind being worried but panic seems extreme". So it proved. US non farm payrolls increased by 320,000 in December. The Fed assured, they would be patient with policy hikes in the year ahead. Hopes are rising of a trade deal with China this month. The Dow jumped 750 points. Nasdaq composite was up 275 points a gain of 4.3%. Fears of recession should evaporate as traders move back into market. Following growth of around 3% this year in the USA, we would expect momentum to be maintained into 2019. In the UK our mid case scenario would be growth of around 1.5% with inflation, borrowing, earnings and employment held at around similar levels to 2018. No need for panic, no real cause for concern ... but then there is Brexit ... oh yes Brexit ... That's all for this week, have a great week-end. We will be back with more news and updates all too soon! John |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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