Good news for the economy this week. Manufacturing output increased by 2.5% in April, exports increased by 9% and construction output increased by 2.5%. Great news for the Chancellor, or is it?
Some would claim it is good news for the “Leave” campaign. The latest economics data presents clear evidence there is no slow down ahead of the referendum, despite the poll swings over the last few weeks.
“Leave” are not focusing on the economy. The Big (I) in the Sky is Immigration, Immigration, Immigration. Voters are worried about the unfettered influx of migrants from the EU and Eastern Europe specifically. The prospect of 76 million Turks living in Torquay and a city the size of Newcastle flashing their EU passports past the douaniers every year, is a real downer for many voters, of left or right.
Leave campaigners have found the pressure point. The Prime Minister is in a hole. Having promised to bring down immigration to the “tens of thousands” he is now unable to talk up the real economic benefits of a growth in population of working age.
Immigration would be resolved …
Don’t worry about immigration. If we were to Leave the EU the economy would slump to such an extent, living and working in the UK may no longer be attractive. An Australian points system would be redundant.
Pressure on health, education, welfare and housing would ease. Just as well, there would be no money to fund expansion and no staff to run health, welfare and build the houses in any case.
Close run thing …
The referendum will be a close run thing. Do “Leave” have the edge? We analyse the arguments into Business, Economics, Political and Social. The latter largely about immigration, the political, largely about sovereignty and who runs Britain.
On business and economics we find there is no business case, nor economics case to leave the E.U. Most of the businesses we talk with are of the same view. On politics and social the arguments are much more finely balanced, but that's politics.
As for the economics …
Manufacturing output increased by less than 1% year on year. The increased driven by developments in transport, pharmaceuticals and food. Most other sectors including metals and capital goods were down year on year. There is no march of the makers and we do not expect much of a revival in the year ahead.
If we leave and adopt Free Trade WTO rules in the process, this would mean the end of manufacturing in the U.K. according to Professor Patrick Minford. Patrick is fast becoming the Pol Pot of economics in a post EU world. 2016 would become Year Zero for UK manufacturing and farming if we vote to leave on the 23rd June
As for trade …
Great news on trade, exports increased by 9% in April. Don’t get too excited. Imports increased by 6%. The trade deficit improved slightly but we still expect the deficit, trade in goods to be around £130 billion this year up from £125 billion last year.
The vagaries of Sterling offer little variance. Exports are relatively inelastic with regard to price, even assuming full pass through. Exports are import dependent. We need imports to export. The correlation between goods imports and exports is over 99.3% [1955:Q1 - 2016Q1].
The deficit on goods and services is likely to increase to a record £40 billion plus this year. The prospect of capital flight and pressure on Sterling will become a real risk were we to leave the EU. We are dependent on the influx of capital from the EU and elsewhere to offset the burgeoning current account deficit. (A record 7% of GDP in the final quarter of 2015)
As for Free trade, be careful, that for which you might wish. The trade deficit with China was £25 billion last year, up from £10 billion just five years ago. The deficits would deteriorate with free trade rules in place.
As for construction …
Construction may have increased month on month but output fell by 3.7% compared to April 2015. Public sector housing and public sector infrastructure spending were down by 20%. Private sector industrial build was down by 8%. Commercial real estate increased by just over 1%. The strong growth area was private sector housing up by 15%. Without government spending and a surge in investment, the dismal outlook for construction will continue this year ...
So what of rates ..?
In the USA, Janet Yellen talks of the resilience of the U.S. economy despite the weakness of the jobs figures last week. Rate rises still an option fro the Autumn?
In the UK, we still expect rates to be at least 0.75% by the end of the year, with two rate hikes to 1% a further (remote) possibility.
So what happened to Sterling?
Sterling closed down against the Dollar at $1.433 from $1.452 and down against the Euro at €1.271 from €1.281. The Euro moved down against the Dollar to 1.128 from €1.133.
Oil Price Brent Crude closed at $50.69 from $49.45 The average price in June last year was $61.48.
Markets, were mixed - The Dow closed up at 17,881 from 17,782. The FTSE closed down at 6,115 from 6,209.
Gilts - yields moved down. UK Ten year gilt yields closed at 1.23 from 1.28. US Treasury yields moved to 1.64 from 1.72.
Gold closed at $1,272 from $1,239.
That's all for this week. Don't miss Our What the Papers Say, morning review! Follow @jkaonline and download The Saturday Economist App! Our review of the Brexit facts and figures out now! Download Here!
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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.