The economy grew by 2% in the first quarter of the year compared to 1.8% in 2016. Household expenditure was up by 2.6%, investment spending increased by 2.2%.  Government spending was up by just 0.8% as the austerity policy continues. Domestic Demand overall was up by 2.3% compared to 1.5% last year.

Is this a sign of an economy radically slowing? Not really. The consumer is not yet demonstrating any real income squeeze. The overall performance of the economy is impacted by government austerity and poor trade figures. The external deficit will create a serious challenge to a lax monetary policy eventually. Sterling moved down this week to $1.28 as the Tory lead fell to just 5%.

The trade balance deteriorated. Imports increased by 4.3% and exports increased by just 2.1%. The deficit increased to almost £12 billion (current values) in the quarter. That's 2.4% of GDP. The chained volume measure is much worse. The deficit increased to £16.5 billion, a heady 3.5% of GDP. In current prices the economy grew by 4.4% to a level of almost £500 billion. Base rates on the floor at 0.25% with strong growth and a widening trade deficit. It just doesn't make sense.

Sensing trouble ahead perhaps, foreign workers are heading home. Net migration fell to just 248,000 in the final quarter of the year. EU citizens are leaving. 117,000 departed, a rise of 31,000 compared to the prior year. The government is committed to reducing immigration to "tens of thousands" at a time of full employment in the economy. The damage to industry and the higher education industry in particular will be significant.

In other news this week ...
Pause for thought at the G7 meetings. The Prime Minister has implemented a U-Turn on welfare policy. The strong and stable Prime Minister has proved to be unstable under fire. The about turn on the budget and now the manifesto have clearly placed the Tory campaign under pressure.

The lead in the polls has slumped to just five per cent. Whitehall is mugging up on the Labour manifesto just in case. Could there be another vote shock following Brexit and Trump? Jeremy Corbyn in Number Ten? What then for Sterling and migration?

The April borrowing figures were released this week. The good news, borrowing fell to £48.7 billion in the financial year 2016/17 slightly better than first estimated. Not so good, Public sector net borrowing (excluding public sector banks) increased by £1.2 billion to £10.4 billion in April 2017, compared with April 2016; this is the highest April borrowing since 2014. Public sector net debt (excluding public sector banks) was £1,722.4 billion at the end of April 2017, equivalent to 86.0% of gross domestic product (GDP). The OBR is forecasting a deficit of £58 billion this year. No real shock in the April numbers.

In the US, growth in the first quarter was up by 2% in the first quarter. Growth of around 2.4% remains possible in 2017. The Fed may act to hike rates next month, one of two rises expected this year. In the UK growth of between 2.0% and 2.4% remains a possibility. As the spread against the Fed widens and the UK deficit deteriorates, the Old Lady may have to act to keep pace the with Janet Yellen.

So what happened to Markets?
Traders were spooked as the Tory lead closed to just five points. Sterling fell, the dollar rallied and markets hit new highs. The Dow closed up at 21,082 from 20,832. The FTSE closed up at 7,547 from 7,470.

Sterling was down against the Dollar to $1.280 from $1.304 and was down against the Euro to €1.144 from €1.1636. The Euro moved down against the Dollar to 1.118 from 1.121.

Oil Price Brent Crude closed at $51.96 from $53.60. The average price in May last year was $46.74.

UK Gilts - yields moved down. UK Ten year gilt yields closed at 1.01 from 1.10. US Treasury yields held at 2.25 from 2.25. Gold closed at $1,280 from $1,251.

John
That's all for this week. Our Economics Forecasts for May will be released at the end of next week, following the second estimate of GDP last week.

© 2017 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
______________________________________________________________________________________________________________
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 receipt of this email should not be construed as the giving of advice relating to finance or investment..
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Rock bottom rates and more of Mr Carney's "infuriating obfuscations" the viewpoint from Phil Aldrick in the Times today. "Wouldn't it be refreshing if Mark Carney were to drop his guard just once and admit the Bank of England is never going to increase rates on his watch."  Well maybe!

It would certainly make for a better understanding of policy. This week the ONS delivered more information on strong sales, rising inflation, more people in work and vacancies rising in an economy growing at around 2.4%.

The Bank is reluctant to raise rates, fearing the squeeze on incomes would hit spending and damage the recovery. Can the standby stance be maintained? This week inflation CPI basis jumped to 2.7%. Service sector inflation hit 3.0%. Producer output prices moderated slightly to 3.6% and input costs eased to 16.6%. The latest data for March suggests earnings in the three months to March were up by 2.7% in the private sector. Public sector pay restraint confined earnings growth to just 1.0%. Earnings overall were up by 2.4%. Unemployment fell to 1.541 million and the number of vacancies reached a record high at 777,000.

The retail sales boom continued with sales values up by 7% in April. Sales volumes jumped back to 4.0% from an average of just 2% in the first quarter. The average spend in the first three months of the year was 4.8%.  Online sales jumped by 19% accounting for 16% of all retail sales. There is no slowdown in retail sales growth. The spending boom continues as real rates remain low.

Deming would say "In God we trust, everyone else must bring data". The data brought, objective analysis presents a "clear and present danger" to the benign monetary stance under the Mark Carney.

In other news this week ...
At the beginning of the month, the PMI Markit manufacturing Index increased to a three year high, signalling a solid start to the second quarter in April. This week the CBI Industrial Trends Survey confirmed, the strong trend of growth, continued into May.

"Manufacturing order books improved on April, and output growth
accelerated in the three months to May", the CBI stated. No wonder Carolyn Fairbairn is smiling.

Rain Newton-Smith, CBI Chief Economist, said: “The summer sun has come out early for Britain’s manufacturers. Robust demand at both home and abroad is reflected in strong order books, output is picking up the pace. On the other side of the coin, we have mounting cost pressures and expectations for factory-gate price rises." Strong order books and rising prices the overview. It is time for the "infuriating obfuscation" to end. The Bank should begin the move to normalize rates and soon.

The Tory or rather "May Manifesto" was released this week. "Blue sky thinking with a hint of rouge" will not please big business. Intervention in the board room with worker representation and curbs on pay will not curry favor among the ranks of the CBI. Arbitrary immigration caps on numbers will compound recruitment difficulties. The "jobs tax on Johnny Foreigner" is perverse and economically illiterate. May's please all centrist manifesto may win the election. The bigger the landslide, the bigger the bank bench problems will emerge. The play full spat over "winter fuel for the well fed" is just the beginning. The dementia tax will be challenged by the back benchers, if they can remember of course ...

So what happened to Markets?
The Dow closed at 20,832 from 20,919. The FTSE closed up at 7,470 from 7,386.

Sterling up down against the Dollar to $1.304 from $1.289 and was down against the Euro to €1.163 from €1.186. The Euro moved up against the Dollar to 1.121 from 1.086.

Oil Price Brent Crude closed at $53.60 from $50.77. The average price in May last year was $46.74. The Russian - Saudi output accord boosted prices.

UK Gilts - yields moved down. UK Ten year gilt yields closed at 1.10 from 1.15. US Treasury yields moved down to 2.25 from 2.38. Gold closed at $1,251 from $1,224.

John
That's all for this week. Thanks to all who attended the Quarterly Economics Briefing at PwC this week. Our Economics Forecasts for May will be released soon, following the second estimate of GDP from the ONS

© 2017 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
______________________________________________________________________________________________________________
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 receipt of this email should not be construed as the giving of advice relating to finance or investment..
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If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a friend, they can sign up here ...
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Inflation Report this week. Inflation Report .. Governor warns of greater monetary tightening. The MPC voted 7 -1 to hold the bank rate at 0.25%, maintain the stock of government bonds at £435 billion and to maintain the purchases of corporate bonds at £10 billion. Good to know the Bank is easing borrowing costs for the likes of Apple Inc, with a market cap of $800 billion and cash reserves of $250 billion. Excellent!

The Old Lady's corporate bond purchases are an indicator of the drift in policy away from market reality. The UK corporate bond market is one of the few remaining investment niches in the investor search for Alpha. Valued overall at around £130 billion, best for the Bank to stay out. Otherwise the MPC will create the biggest "corporate bond bubble in history", just as has been done with gilts.

So why are rates on hold? The Bank has adjusted the forecast for growth in the current year to 1.9% from 2.0% in February. It is a modest adjustment. A mere typo in publications from the Office for National Statistics. The Bank remains concerned about the prospects for household spending given rising inflation and the slow growth of wages. Inflation is set to peak towards the end of this year at just under 3%. Earnings are set to rise around 2%, hence the arithmetic squeeze on real incomes.

The good news, slowing household spending will be offset by growth in investment and net trade. Business surveys and bank agents reports, imply that investment growth will be higher in 2017 than previously expected. The bank also believes that stronger growth in world trade and a weaker sterling will lead to an improvement in the net trade balance.

Growth in world trade will lead to an increase in imports, this is true. The problem is exports have a high degree of import dependency. There is little or no substitution effect from sterling weakness. The growth in investment may well hold. The trade deficit (goods) will increase to over £140 billion this year.   

So what of growth? Growth in the first quarter was around 2.4% according to the preliminary estimate of GDP released at the end of April. The latest data for manufacturing and construction confirm our Q1 estimates of GDP growth. The portent for a larger trade deficit is also confirmed with an ominous rise in the first quarter trade gap.

So what of rates? The Governor warns that if "the economy follows the path broadly consistent with the May projection, then monetary policy could need to be tightened by a somewhat greater extent than the yield curve would currently imply". And that is about as hawkish as the Governor has been for some time! Kristin Forbes was the only member of the MPC to vote for a rate rise this month. If the data unfolds as we expect others will be set to follow ...

In other news this week ...
The trade deficit in goods increased to £37 billion in the first quarter. This compares with a shortfall £32 billion in the same period last year and in the final quarter of 2016. For the year as a whole we project a trade in goods deficit on £144 billion compared to £134 billion last year. So much for the ephemeral benefits of sterling depreciation, as we have long explained.

Growth in Europe and the rest of the world will stimulate demand for exports. Domestic growth and a high dependency on imports will compound the trade balance deterioration. The deficit in goods was offset by growth in the service sector surplus of £26 billion. The service sector, particularly tourism, enjoys much higher price elasticity [than goods] and profits from world growth. The overall trade in goods and services deficit for the year as a whole is likely to be over £45 billion compared to £37 billion last year. As the deficit moves to 2.5% of GDP, the Bank of England will be forced to review the accommodating monetary stance before markets force the call.

Manufacturing growth increased by 2.3% in March and by 2.5% in the first quarter of the year. Construction growth increased by 1.8% in the same period. It's a "mixed bag". New housing was up by 4.3%, Commercial real estate growth was up by 7.3%. Infrastructure spending was down by 4.2%. Industrial building was down by 18%. The overall data for manufacturing and construction were in line with the preliminary GDP estimates. There has been no change to our outlook for the current year. We still expect growth to be between 2.0% and 2.4%. Strong growth, rising inflation and maturing trade gap ... time to tighten by a somewhat greater extent!

So what happened to Markets?
The Dow closed at 20,919 from 20,944. The FTSE closed up at 7,386 from 7,297.

Sterling was down against the Dollar to $1.289 from $1.296 and was up against the Euro to €1.186 from €1.179. The Euro moved down against the Dollar to 1.086 from 1.099.

Oil Price Brent Crude closed at $50.77 from $48.96. The average price in May last year was $46.74. The inflation impact fades into the second quarter of the year.

UK Gilts - yields moved up. UK Ten year gilt yields closed at 1.15 from 1.12. US Treasury yields moved up to 2.38 from 2.36. Gold closed at $1,224 from $1,225.

John
That's all for this week. Don't miss our economics update at PwC Manchester on the 18th May. It's usually a sell out so make sure you book now! As always we appreciate your support. "Join the Club" for those special insights into currencies and markets. Your support will boost our research and improve the products we offer.

© 2017 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
______________________________________________________________________________________________________________
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 receipt of this email should not be construed as the giving of advice relating to finance or investment..
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If you do not wish to receive any further Saturday Economist updates, please unsubscribe using the buttons below or drop me an email at [email protected]. If you enjoy the content, why not forward to a friend, they can sign up here ...
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For details of our Privacy Policy   and our Terms and Conditions check out our main web site. John Ashcroft and Company.com
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Copyright © 2017 The Saturday Economist, All rights reserved. You are receiving this email as a member of the Saturday Economist Mailing List. You may have joined the list from Linkedin, Facebook Google+ or one of the related web sites. Our mailing address is:
The Saturday Economist, Tower 12, Spinningfields, Manchester, M3 3BZ, United Kingdom.

It's a car crash in April as new registrations fell by 20% in the month compared to prior year 2016. Should we worry about a slow down in consumer spending? Not really. Retail spending in the first quarter of the year was up by almost 5% compared to the same period last year. Higher inflation meant that more spending bought less in volume terms. Slowing volumes grabbed the headlines but values increased. Don't write off the consumer just yet.

Bumper car sales in March ahead of the increase in Vehicle Excise Duty pulled registrations forward into the first three months of the year. SMMT Mike Hawes suggests year to date sales remain strong up by 1.1%. A record 972,092 cars were registered in the first four months of the year. Diesel car sales are taking a hit. Sales were down 27% in the month and down by just over 6% year to date. Consumers are confused about diesel! For the year as a whole we expect registrations to be just over 2.7 million. A modest increase on the 2016 record.

Over in the U.S. the Fed held rates at current levels signalling two further rate rises this year. Non farm payrolls rebounded in April with 211,000 joining the labor market, pushing the unemployment rate down to 4.4%. It hasn't been that low since May 2007. The President tweeted "Jobs, Jobs, Jobs" "Great jobs report! It's all beginning to work." Maybe running the economy is easy after all. Recruitment difficulties are increasing raising fears of a wage hike. The President may have to relax the rules on immigration and make a hole in the big beautiful wall to ensure "It" will continue to work ...

In other news this week ... Markit/CIPS updates ...
Construction growth picked up in April, driven by civil engineering activity, according to the Markit/CIPS Construction PMI. It was the sharpest increase in activity this year. The lead index jumped to 53.1 from 52.2 prior month. Greater demand led to greater hiring. The availability of sub-contractors became more restricted adding to the challenges in recruiting skilled labor. Demand for construction materials increased with supply lead times extending to the greatest degree since June 2015. 

Manufacturing increased to a three year high according to the Manufacturing PMI. The data suggested a strong start to the second quarter, following the 2.8% growth in the first quarter. The lead index leapt to 57.3 from 54.2 last month. Demand at home and in export markets remained strong. Concerns about cost inflation were evident. Advance purchase action, to hedge against further price hikes, was also significant in the month report.

The service sector continues to deliver. The rate of growth accelerated in the month. The lead index increased to 55.8 from 55.0 in March. Strong demand is leading to a modest increase in job expansion with cost fears again evident in the sector.

Overall the survey data suggests GDP growth is likely to continue into the second quarter at a similar rate to the first quarter. Last week, the preliminary estimate of GDP confirmed growth of 2.8% in manufacturing, 1.9% in construction and 2.5% in the service sector. Whilst many focused on the slowing quarter on quarter growth rate, we always focus on the year on year growth rate. It must have been around 2.4% given the strong growth in production, services and construction. 

In the UK. growth is above trend, inflation is rising, unemployment is falling, recruitment difficulties are increasing. In the U.S. the Fed is making the move. In the U.K. the Bank of England must act soon. It is not just "behind the curve ... it's asleep at the wheel ..."   

So what happened to Markets?
The Dow closed at 20,944 from 20,950. The FTSE closed at 7,297 from 7,224.

Sterling was up against the Dollar to $1.296 from $1.294 and was down against the Euro to €1.179 from €1.187. The Euro moved up against the Dollar to 1.099 from 1.089.

Oil Price Brent Crude closed at $48.96 from $51.64. The average price in May last year was $46.74. The inflation impact fades into the second quarter.

UK Gilts - yields moved up. UK Ten year gilt yields closed at 1.12 from 1.10. US Treasury yields moved up to 2.36 from 2.32. Gold closed at $1,225 from $1,269.

John
That's all for this week. Don't miss our economics update at PwC Manchester on the 18th May. It's usually a sell out so make sure you book now! As always we appreciate your support. "Join the Club" for those special insights into currencies and markets. Your support will boost our research and improve the products we offer.

© 2017 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
_____________________________________________________________________________________________________________________________
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 receipt of this email should not be construed as the giving of advice relating to finance or investment..
___________________________________________________________________________________________________________________________
For details of our Privacy Policy   and our Terms and Conditions check out our main web site. John Ashcroft and Company.com
_______________________________________________________________________________________________________________
Copyright © 2017 The Saturday Economist, All rights reserved. You are receiving this email as a member of the Saturday Economist Mailing List. You may have joined the list from Linkedin, Facebook Google+ or one of the related web sites. Our mailing address is:
The Saturday Economist, Tower 12, Spinningfields, Manchester, M3 3BZ, United Kingdom.