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!
The Saturday Economist
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