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.
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.
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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.