Different strokes – Economics Weekly
The US economy is motoring along, driven by recent tax cuts, keeping the Fed on course for further gradual tightening in coming months. However, signs of weakness in the Euro area mean a rate hike is some way off.
31 October 2018
While it lasts. The US mid-terms are next week. Handy then that Trump can point to a fired up economy as he attempts to keep control of both houses of Congress. GDP notched up a punchy 3.5% annualised pace in Q3, down a little from 4.2% in Q2. Consumer spending remained robust at 4% annualised. Government spending was also buoyant. But the report wasn’t without its concerns. Investment was disappointing, particularly when there are numerous reasons for it to be strong, including recent tax cuts, strong business confidence and difficulties recruiting staff. Meanwhile, residential investment fell for the third consecutive quarter. At what should the finger be pointed? It could well be those Fed interest rate hikes.
Sit tight. Modest to moderate economic growth – that’s what the majority of the US regions reported in the Fed’s 7th Beige Book of the year. Things looked good as internal demand remained strong and consumer spending modestly increased. At the same time though, the economy wasn’t completely unscathed by trade uncertainties and a taut labour market. On the one hand, input costs are rising, beleaguered by impending tariffs. On the other, businesses have found themselves worrying about labour shortages and retention. In other words, supportive of a Fed biased toward tightening rates further!
Whoa. The Eurozone economy seems to have stumbled recently. Key evidence is October’s ‘flash’ PMI, which slipped from 54.1 to 52.7 on the month, the lowest level in over two years. Both services and manufacturing fell, with the decline in new manufacturing exports particularly steep, due to a likely slowdown in global trade and the fallout from changes in European auto emissions standards. Some perspective is useful mind. Firms are hiring and the region’s economy remains on track to grow by 0.3% in Q4. Manufacturing exports should also rally a little. So the panic button can safely stay under lock and key.
Rendezvous in December. Surprise, surprise. The ECB left rates unchanged at October’s Council meeting, as expected, but ECB President Draghi stressed QE is on course to be halted by year-end. Mr Draghi acknowledged recent soft business surveys but remains confident of a continued gradual Euro area upturn, leaving risks to growth as “balanced”. The ECB anticipates a gradual rise in core inflation over the medium-term, driven by rising wage growth and elevated capacity utilisation. Still, a rate hike is a long way off as the ECB maintains an accommodating monetary stance.
Fixing the roof while the sun shines. The Euro area’s government deficit and the stock of public debt both narrowed in 2017 compared to 2016. What’s even better is that the favourable trend has persisted into the first half of 2018 as the majority of member states have continued to pay down public debt. Thanks to a mix of low interest rates, solid growth and fiscal austerity, the currency union’s deficit fell to a mere 0.1% GDP in Q2, the lowest recorded value. Yet, the European Commission can’t sit pretty. 2019 looks challenging in face of Brexit-related uncertainty and ‘profligate’ Italian budget plans.
Passing the ports. 48 years after the introduction of the Equal Pay Act there is still room for improvement. In 2018 the pay gap for full-time workers was 8.6%, a record low. Including all workers the gap rises to 17.9% due to more women working in lower paid, part-time jobs. The pay gap is near zero for full-time workers aged 18-39 but widens after 40 years. The pay gap varies by occupation greatly and is often negative. On a regional basis, the surprise is the pay gap in London has barely narrowed over the past 20 years: it was the lowest in the UK in 1998 (15%) and is now the highest (13.7%).
Equal pay for equal work? Housebuilding activity remains sluggish despite the strong US economy. US housing starts rose at an annual rate of just 1.2 million in September compared to 1.5 million or more during the last economic expansion. Even excluding Hurricane Florence, which depressed housebuilding in the South, there is no sign of growth. Building permits indicate no increases in the pipeline. Why? Rising interest rates are reportedly depressing home sales: the 30-year fixed mortgage rate jumped 19bps to 4.9% last week and 99bps over the past year, worsening affordability.
Sliding. China’s currency has been weakening of late, so too its stock market. In the past six months the Chinese Yuan has fallen 9%, driven by softer economic activity at home and trade tensions abroad. Indeed, the currency has recently skimmed levels not seen since the financial crisis. That makes China’s exports more competitive and so potentially offsets some of the impact of Trump’s tariffs. But China won’t want to see it depreciate too much. Intervention to prevent further material falls are likely. It all evokes memories of 2015-16 when a bout of financial turbulence prompted substantial capital outflows from China and more than a few global jitters.
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Good news for the consumer. Not only have average earnings posted their largest rise since 2009 but inflation fell more than expected, boosting hopes the recent real income squeeze is coming to an end.
UK growth has picked up a bit of speed in Q3, judging from latest monthly GDP figures, with strength widespread. However, recent favourable weather flattered the headline rate, so a moderation in growth looks likely in Q4.