So what's the problem ...
The US economy grew by 3.2% in the first quarter of 2019. It was the strongest rate of first quarter growth in four years. The US economy has started the year with a "pop" making nonsense of the negative sentiment surrounding forecasts for the year.
We expect the US economy to grow by 2.8% this year compared to 2.9% in 2019. China reported growth of 6.4% in the first quarter earlier this month. We expect UK growth to be around 1.9% in Q1 as we explained last week. It is difficult to understand the pervading gloom surrounding central bankers.
The Bank of Canada, joined the mood swing, downgrading Canadian growth forecasts for the year to 1.7% softening rates in the process. In the US ten year bond yields slipped to 2.5% despite the strong GDP numbers. The Fed is unlikely to move on rates this year, unless we see a significant rise in underlying inflation. We attach little or no probability to a rate cut.
US growth was supported by a 2.7% rise in consumer spending across goods and services. Private investment increased by over 6% with a strong performance in buildings, equipment and IP. Defense spending increased by over 5% offsetting cuts in other state expenditure.
There were some strange twists to trade. Exports increased by 2.3%, imports increased by 1.6%. We still expect the current account deficit to exceed $600 billion dollars this year. The prospects for the internal deficit are far worse. The Fed budget balance is set to hit $1 trillion in the current fiscal year and will average over $1.2 trillion over the next five years according to the Congressional Budget Office. Debt could double to over $40 trillion dollars by the end of the decade.
There is little or no appetite to deal with the deficit among Republicans and Democrats alike. The President has made it clear the real problem will emerge, long after he has left the White House. If the Democrats have there way it could be as early as next year ... Wake Up Sleepy Joe ...
UK Borrowing Falls ...
In the UK, government borrowing fell to £24.7 billion in the financial year to March 2019. It was the lowest level of borrowing for 17 years. Borrowing was down by over £17 billion compared to prior year.
The out turn was slightly ahead of OBR forecasts in March. Chote and Chums had expected borrowing in the year to be just £22.8 billion. The March figures came in at £1.7 billion, up by £1 billion on prior year.
Total debt was £1.8 trillion, a modest 83% of GDP. Revenues in the year were up by 5%. Spending increased by just 2%. Who said debt reduction was difficult? VAT revenues increased by almost 6%. Income tax and Capital Gains Tax receipts were up by 7%. The UK economy grew by just 1.4% in the calendar year for 2018. A remarkable contribution to state coffers suggest growth may have been higher and almost certainly continued into the first quarter of the year.
Interest payments fell to £48 billion from £55 billion prior year. The coupon rate fell to 2.7% from 3.0%. The Bank of England givebacks fell to £8 billion from £9.3 billion prior year. The "money for nothing, gilts for free" policy, known as the Asset Purchase Facility, continues to yield great gains to Treasury.
Things may become a little more difficult for the Chancellor in the current year. Other spending increased by 3.4%. Public sector pay is on the rise. The pressure to boost spending on front line services are increasing. We expect growth to continue to boost tax revenues. Even so, the deficit is expected to rise to over £30 billion in the current financial year ...
Looking for a hero ...
Looking for a hero, the story in the FT today.
Headhunters have been appointed to recruit the next Governor of the Bank of England. Mark Carney is set to leave office at the end of January next year. If the bookies are to be believed, they won't have to look too far.
Andrew Bailey is the front runner. Odds of 2/1 confirm the current CEO of the Financial Conduct Authority is favourite to succeed. A safe pair of hands, with a global reputation in banking supervision and financial stability, he has served as Deputy Governor and Chief Cashier having joined the Bank in 1985.
Other insiders featured are Jon Cunliffe, Deputy Governor for Financial Stability and Ben Broadbent, Deputy Governor Monetary Policy. Odds of 6/1 are offered. The outside insider is Andy Haldane Chief Economist at the Bank. The Chief Economist is considered to be "too thoughtful and too academic" to be the institution's leader. Recent speeches on "Artificial Intelligence" and the "Future of Work" are inspirational. "The Dog and the Frisbee" a step by step guide to how a dog catches a flying object, less so.
Fancy a foreigner? Raghuram Rajan Odds 5/1 is currently a Professor at the University of Chicago Booth School of Business. As a former chief economist at the IMF and former governor of the Reserve Bank of India, Raghuram Rajan is considered to be well qualified for the role of governor, should he wish to take on the challenge.
Haruhiko Kuroda (黒田 東彦 Kuroda Haruhiko, is the current Governor of the Bank of Japan. He was formerly the President of the Asian Development Bank. He is considered to be particularly well qualified having little or no great experience of increasing interest rates.
Looking for gender balance, (chosen on merit of course) Minouche Shafik now at the LSE, Shriti Vadera Chair of Santander and Sharon White CEO of Ofcom, feature. Rank outsider, you can get 50/1 on George Osborne if you fancy a flutter.
For the moment, the bookies have stopped taking bets on Bailey, he may well have peaked too soon ...
That's all for this week, have a great weekend. We will be back with more news and updates next week!
Retail Sales Boom ...
Retail sales volumes jumped by 6.7% in March, increasing by over 7% in value compared to prior year. Shoppers were shrugging off Brexit fears, splashing the cash and flashing the cards in defiance of forecast gloom. Online sales were up by 12% accounting for almost 20% of all transactions. Clothing and footwear sales were up by over 7%.
Comparisons with prior year were distorted by the dismal performance last year. The "Beast From The East" roamed the streets in 2018. Milder weather this year and stock piling of toilet rolls apparently, may have boosted sales.
Adjusting for the low figures last year, retail sales in volume and value were up by 5% in the month and over 4% in the quarter. Spending is enhanced by a strong jobs market, low inflation and real income growth. In March CPI inflation remained below target at 1.9%. As always we caveat, goods inflation increased by just 1.3%. Service sector inflation increased by 2.5%. The service sector and producer prices indicate moderate inflation pressures remain to challenge the benign interest rate outlook later this year.
Earnings increased by 3.5% in the three months to February. Real income growth is up by 1.6%. The unemployment rate remains steady at 3.9%. The number of vacancies in the economy was over 850,000. The number unemployed was just over 1.3 million.
Consensus forecasts suggest growth of 1.3% for the year. As we explained last week and illustrated in our detailed graphic below, don't be too surprised when the mood swings to the upside as group think catches up with reality ...
Markets Rally ...
Markets rallied in the East this week. Growth in China increased by 6.4% in the first quarter ahead of expectations. In the US, the outlook for first quarter growth has suddenly shifted upwards after a series of better than expected data releases later in the quarter.
The first estimate of US GDP growth will be released at the end of the week. Market expectations of 2.3% growth will prove to be too pessimistic. Expect markets to rally and bond yields to bounce as the yield curve will gyrate to a revised forward rate curve.
The Federal Reserve came under pressure again this week. Chief Economist Trump took time out from advising the Paris fire fighters to criticise the Fed. Markets would be 5,000 to 10,000 points higher. Growth would be nearer 5% if monetary policy were to follow the President's guidelines.
Trump advised the French fire service to "act quickly" with the Notre Dame fire and "water bomb" the medieval structure. "Perhaps flying water tankers could be used to put it out" Trump tweeted. "Must act quickly" the helpful advice.
The Paris firefighters were quick to respond. "Hundreds of firemen of the Paris Fire Brigade are doing everything they can to bring the terrible Notre Dame fire under control. All means are being used, except for water-bombing aircraft which, if used, could lead to the collapse of the entire structure of the cathedral."
If only Jerome Powell head of the Fed could be so direct. Fed monetary policy was completing the departure from Planet Zirp. The seat belt signs had been turned off, the drinks trolley set to roll. A volte face by the Fed suggested no more rate rises this year. Rate cuts appeared a possibility. A bird strike was forcing the Fed to return to Planet Zirp. The intervention of the White House untimely and unwelcome. As if Trump did not have enough on his plate this week ...
Not founded on facts ...
The Mueller report was released . Partially redacted, the initial response from the President was jubilant. The Russians had interfered with the US election process. The objective, to influence the vote in favor of Trump but so what! There was no collusion between the campaign team and the Kremlin. No collusion, Trump was in the clear.
"I am f****d" Trump had said on the announcement of the Mueller enquiry. "This is the end of my presidency" he had claimed. It may well yet be. Mueller has laid out a series of revelations about clear obstruction of justice or attempts to do by the President.
The report identifies a President determined to put an end to the investigation. Trump fired FBI Director Comey. He asked for the investigation into Michael Flynn to be abandoned. He put pressure on Jeff Sessions to act to curb the theme and scope of the investigation. He tried to fire Mueller.
Attempts to scupper the investigation failed. They failed in some cases because White House staff would not execute the President's orders for fear of criminal accusation. White House counsel Don McGahn deliberately disobeyed Trump instructions fearing formal "obstruction of justice" charges. McGahn explained the president had asked him to do “crazy shit". Trump accused his counsel of taking too many notes during meetings in the Oval Office. "I have never know a lawyer take so many notes" he said.
The most concrete takeaway from the 448-page Mueller report according to Politico is the damning portrait of the Trump White House as a place of chaos, intrigue and deception, where aides routinely disregard the wishes of a president with little regard for the traditional boundaries of office. They also lie with impunity.
When Trump fired Comey in May 2017, White House press secretary Sarah Huckabee Sanders explained "Comey was unpopular in the FBI. "Countless members of the FBI had told the White House they'd lost confidence in the former FBI director" she said.
Challenged under oath during the Mueller investigation Sanders admitted the remarks were "not founded on anything" and were just a "slip of the tongue". With such unfounded lies are reputations damaged.
The Mueller report has laid out a careful trail, exposing evident "obstruction of justice" attempts by the President. It is now for the Democrats to decide if they wish to pursue the case for impeachment. The party is divided.The 2020 election is less than 19 months away. Lots of time for Trump to dig a bigger hole before the electorate gets a chance to take the option or not on "Four More Years" ...
That's all for this week, have a great Easter weekend. Enjoy the sunshine. We will be back with more news and updates next week!
We have a delay ...
Our worst Brexit fears realized. Nigel Farage has a new political platform. The Brexit Party is pledged to fight the European elections and to secure more TV time for the EU MP.
No more "Mr Nice Guy" the promise. Like the layers of a French onion, there is a more objectionable depth to Farage than we have seen to date apparently.
"We will change politics for good" claims Farage. With a fund of £750,000 raised in just ten days, they will probably have to use Facebook. The Brexit Party is a bit like UKIP without the racism for now. The beer swilling, fag smoking imagery is out. Annunziata Rees-Moog, sister of Jacob, has been recruited to polish up the image and grab the youth vote.
"We will rescue democracy" announced Annunziata "We will show the people of this country they have a say in how we are run". Excellent. There is a look and sound of Evita Peron to this Mogg.
In other news, the Theresa May has secured an extension to the Article 50 process. A request for delay until the end of June was met with the generosity of the masochist. The Prime Minister's tortures are set to continue until October. The Conservative Party will dress up for the Halloween Party as May returns in six months time for a further "Trick or Treat" request.
As Brussels spouts and Beatles sing, "It's a long and winding road, that leads to your door, it will never disappear, I have seen that road before." Ah Theresa, "It seems to me, you live your life, like a dangle in the wind, never knowing who to cling to, when the rain sets in." Anon.
Yes Brexit the musical coming soon, unlike a solution to the real problem ....
Say Cheese ...
US trade wars with the EU are set to escalate. Trump plans a series of tariff hikes on cheese and choppers. Airbus become a target along with swordfish steaks, salmon fillets, trout and crabmeat.
Cheese is on the list, especially Roquefort, grated or powdered. For Edam, Gouda and Gruyere, there is no grate escape. Cheddar and Stilton are on the table for tariffs. The inclusion of lemons and olive oil is set to lose the Italian vote. How the Godfathers would shudder to hear the news.
The full list of threatened species, runs to fourteen pages. There is no escape for clams and carpets as the vengeance of the White House is directed at friend and foe alike. The tantrums of "Tariff" Man persist. How long must this go on ...
Good news for the UK economy this week ...
The latest data on growth, and output suggests the economy will expand by 2% in the first quarter of the year. Construction output will be up by over 3.5%. Service sector output will be up by 2%. We expect strong growth in the leisure and distribution sector offsetting weakness in business and professional services.
Manufacturing output is set to increase by just 0.6%. There is no significant boost to output from stock building ahead of Brexit. The GDP growth is already reflected in strong job numbers, rising wages, good borrowing figures and a deteriorating balance of payments deficit.
Growth for the year as a whole is more likely to be 1.7% plus, rather than the 1.2% now penciled in by the rather gloomy IMF. In the US, growth is likely to be around 3.0% in the first quarter. The Federal Reserve may well review any decision to hold rates through 2019, the pessimistic outlook for Uncle Sam's back yard will have to be updated and soon.
World Banker ...
In the US, Trump continues to demonstrate his inept people management skills. The head of Homeland Security Kirstjen Nielsen was asked to resign. The head of secret service, Randolph Alles was fired.
Trump continues to threaten to close the border, separate families on arrival and move migrants into sanctuary cities. Refugees may be queuing at the border, but few officials are lining up to serve under the President." You know who really runs Homeland Security" said Trump this week, "I do".
President Trump has spent the last few weeks trying to bend to his will three of the federal government’s least political institutions – the Department of Homeland Security, The Federal Reserve and The Department of Justice.
Trump has tried to build the Department of Homeland security in his own image, purging staffers who disagreed with him, or those thought to be insufficiently loyal. At the Fed Trump would like to stack the bench with political surrogates who will respond to his bidding including Pizza King Herman Cain.
There are signs the Republicans are becoming nervous about Trump nominations. Mitch McConnell, Senate Majority Leader said this week, "I’ve not spoken to him about any of them. I have expressed my, shall I say, lack of enthusiasm for one of them. There are a number of members … who have had some reservations about some of the names that have been mentioned.”
Doubts about the dynasty would not have been assuaged this week. In an interview with Atlantic Magazine, Trump revealed he considered appointing Ivanka as head of the World Bank. Why not she is "good with numbers" apparently. Trump also disclosed "She would have made a great ambassador to the UN". "I could have made the appointment but people would have accused me of nepotism". Nepotism ... the very idea!
That's all for this week, have a great week-end. We will be back with more news and updates next week!
Parliament is falling apart according to Matt Chorley in the Times today. The Houses of Parliament surrounded, not by demonstrators but by scaffolding. Support structures, in place, not to effect repairs but to catch the bits that are dropping off.
A warning message was sent to MPs this week, debris had fallen into the colonnade connecting Portcullis House with the Palace of Westminster. More effective than a three line whip, the objective was to move members of parliament away from danger. Crisis avoided. They moved as one, just as the nation is demanding on Brexit.
Toilets are blocked, not the only impasse in the house. Mice are rampant, like naughty back benchers in debate. Proceedings were suspended. Water was pouring through the roof of the Commons Chamber. Relief abounded with the realisation it was rain, not sewage. falling onto the heads of honourable members.
Outside the chants continued, "What do we want?" "Not quite sure" "When do we want it?" "Not just yet." Theresa May has written to the EU to ask for an extension to the Article 50 process. Allegedly the date is set for the 3oth June 20**. We remain confident the deal will be done in this century at least.
In another place, the dream team awaits to resolve the crisis. Jeremy Corby and Shadow Brexit Secretary Keir Starmer were invited by the Prime Minister to join cross party talks this week. The invitation followed a mammoth seven hour cabinet meeting on Tuesday. Hopes were raised of a composite customs union deal.
Hopes were dashed by the end of the week. Labour claimed Theresa May had failed to offer real change or compromise. Cross party talks had become an exercise in listening to an increasingly isolated leader.
The Mogg tweeted "If a long extension leaves us stuck in the EU, we should be as difficult as possible. We could veto an increase in budget, obstruct the EU army and stop eating French cheese". I made the last bit up! Parliament is falling apart, there is no scaffolding to catch the bits that are set to fall off, in the not too distant future.
UK Car Sales Fall ...
Car Sales fell in March according to the latest data from the SMMT. Registrations were down by over 3% in the month and 2.4% for the year to date.
Mike Hawes Chief Executive made a plea to government. "We urgently need an end to political and economic uncertainty by removing the threat of a no deal with Europe." "We need to agree a future relationship that avoids trade friction, increasing costs and prices". Yes Amen to that.
March is a critical month for the industry. The plate change drives buyers into showrooms. Car demand is often seen as a bellwether for consumer confidence and the health of the economy. Not so much this time round. The trends in sales are much more structural rather than cyclical. Petrol sales were up by 5%. AFVs were up by over 7%. Diesel sales fell by over 20%. Consumers are confused by the diesel story. The move to hybrids and plug ins, is accelerating. The industry is struggling to cope with the demand for greener driving.
Sit back and relax. In a new report, the SMMT reckons the UK consumers could be among the first to benefit from self driving vehicles. Lives will be saved and accidents avoided in an industry switch worth some £62 billion by 2030.
The ability to achieve this will be dependent on securing a deal with the EU which benefits the automotive industry. It doesn't seem to be too much to ask but fears abound of a no deal prospect. Strange that some on the right, still think this is a great idea ...
US Jobs Rally In March ...
In the US, 196,000 jobs were added to the payroll numbers in March. The move was ahead of expectations, reducing fears of a slow down in growth for the year. The unemployment rate held at 3.8%, earnings eased back slightly to 3.2%.
In the first three months of the year, job creation averaged 180,000. The February data was an anomaly. "February was a blip, we aren't seeing any decrease in demand for workers" said one of the leading recruitment firms. Recruitment difficulties are increasing. Wages are set to rise further in the US as in the UK.
The US economy grew by an estimated 2.9% in 2018. In the second half of the year, the average rate of growth was 3.0%. That may be as good as it gets but we do not expect any radical slowdown in growth for the year. The Fed has reversed stance on more rate hikes for the moment. Ten year US rates moved back towards 2.5%. The yield curve is no longer inverting. The Fed expects growth to slow but we expect an upward revision for growth and monetary policy.
On Friday, The President called for the Federal Reserve to cut rates and resume QE. The Chairman of the Fed Jerome Powell received some assurance on job security from the truculent Trump this week. "I guess I am stuck with you," Trump said in a phone call. The administration would like to see a cut in rates of 50 basis points. "The economy would climb like a rocket ship" claimed Trump.
Trump is proposing appointments to the Fed including Wall Street journalist Stephen Moore and Pizza executive Herman Cain. Both have expressed agreement with Trump on the need for rate cuts. Both have called for a return to the gold standard. Both are rated with a high level of economic illiteracy.
The President threatened to close the border with Mexico this week, then dialed back the threat with a possible 25% tariff on car imports if the hordes on the frontier were not reduced. The independence of the Federal Reserve is under threat. Column inches and pizza toppings do not provide adequate preparation for the custodians of monetary policy in the most powerful economy in the world.
An economy climbing like a rocket ship, with a growing trade deficit and soaring government borrowing will require emergency rate hikes ere to long if any semblance of normality is to be restored.
That's all for this week, have a great week-end. 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 updates on the UK and World Economy.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.