The Preliminary Estimate of UK GDP was released on Friday. Growth in the first quarter was up by just 1.2% compared to 1.8% for the year as a whole in 2017. The economy is slowing exacerbated by a big fall in construction output (down 3.3%).
"You can't lay bricks when the snow is falling", the obvious explanation. But you won't secure real growth in the absence of government activity. Construction may have been hit by the "Beast from the East". But the absence of government expenditure on infrastructure and public sector housing has been the real blight to growth in the sector for some time now. The construction data is incredibly volatile and subject to revision. Remember the preliminary estimate is made with less than half of the data to come as the series is revised in the months ahead. Even so we expect little growth this year from the sector as a whole.
"You can't lay bricks when the snow is falling"
Without the distortion in construction, growth would have been around 1.5% in the first quarter. One reason we now expect UK growth of around 1.5% for the year as a whole. Manufacturing output increased by 2.5% year on year, despite the drop in car output, where fears about the economy and the "damnation of diesel" persist. Service sector growth was down to just 1.2% with zero contribution from the public sector. The leisure sector increased by less than 1%, attributed to pressures on real incomes and fears about the economy in the months ahead. Business services were up by 1.8% plus there was a heady 2.8% contribution from transport and distribution.
"For the economy to stall it is sufficient that good government does nothing ..."
For the economy to stall it is sufficient that good government does nothing. Zero growth in the public sector, an absence of real commitment to infrastructure and public sector housing, pressures on local authority cuts. The list is mounting as the process of misdirection continues. The government may blame the "Lack of Investment" in the private sector or "Lack of Productivity Gains" in the labour sector. It is the conjuror's trick of misdirection.There is little or no thought to what's happening in the real economy, as government twists and turns with the torture of Brexit and the Customs Union. What folly there lies within ...
Last week we said "It is time to fix the roof, now the snow has blown away". It is clear, low growth in the first quarter will take the pressure off the MPC to raise rates next week ... it will remain an opportunity missed …
High growth puts pressure on the Fed to hike rates ...
In the U.S.A., growth increased by 2.9% in the first quarter of 2018. Growth has been accelerating since the second quarter of 2016. We expect growth of almost 3.5% this year as the Trump tax give away provides a real stimulus to growth.
High growth will put pressure on the Fed to continue the rate hike programme this year and into next. The Blue Dot forecast predicts rates at 3.5% within three years. It seems far more plausible now, as US growth progresses above trend rate.
Ten year bond rates closed down, just below the 3% level this week. Why? The headlines in the USA and the UK talk of "slowing growth" not accelerating growth. "U.S Growth Cooled In First Quarter", the headline in today's Wall Street Journal. It is nonsense, based on the bizarre obsession with quarterly growth rates then annualized.
The year on year arithmetic is simple and straightforward. The pattern of growth is clear. We expect bond rates to rally into 2018 hitting 3.5% by the end of year. Talk of the inverted yield curve is premature. Ten year bond yields will normalise, long before short term Fed rates. Inversion may occur but not for some time yet. If the yield curve really is the predictor of recession as some insist, it will not be speaking out for some time yet. For now enjoy the ride.
Peace in Korea is our footnote this week ... Trump Play or Trump being played ...
The historic meeting between Kim Jong-Un and Moon Jae-In bodes well for peace in the Korean peninsula. Trump stands ready to take credit for the progress. Talk of the Nobel peace prize maybe a little premature. But tough talk from Trump is thought to be the catalyst for peace. Is that really the case?
Is peace in Korea a Trump play, or is Trump actually being played by the Koreans and the Chinese? Beijing has much to gain from a nuclear free Korean peninsula and a formal end to the war. Unification would open the peninsula to the parasol protection of the expanding Chinese empire and the withdrawal of U.S. troops. The White House is demanding Seoul meets a bill, it will no longer need to pay. Demands to reduce the trade deficit with the U.S. would be facilitated by trade with China to the North. Unification would be as beneficial to Beijing as German Unification was to Bonn.
U.S. international policy is conflicted and confused. Moon Jae-In will hedge the risk of a Trump tantrum on trade.The Koreans are mindful China will become the largest economy in the world within ten years. The expansion of the mighty people's navy will guarantee control of the Taiwan straits. Peace in Korea is a win win for Beijing. The dragons will be dancing long before the Trump administration hears the music.
That's all for this week, Have a great week-end,
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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