Quarterly Economics Presentation Review

Thursday, 24th May 2018

By Dr John Ashcroft, pro-manchester CEO & author of The Saturday Economist

The FTSE host a record high this week. The Pound continued to fall against the Dollar. The outcome will be of no surprise to those who attended the pro-manchester Quarterly Economics Presentation last week.

Almost 100 delegates signed up for the quarterly economics update on the UK and world economy. The event was hosted by Squire Patton Boggs in their new offices at Number One Hardman Square. Great views over the city!

A focus on the fundamentals, as far as markets were concerned, suggested there was still some strength in the market bull run in the UK and the USA. Contrasting trends in monetary policy suggested Sterling would continue to come under pressure, as short rates and ten year bond rates were set to rise further in the USA.

The Governor of the Bank of England and come under pressure during question time at the Inflation Report presentation this month, as our videos clips demonstrated.

In February, Mark Carney has suggested rates would rise “earlier and to greater extent” than markets had been led to believe in November. By May the position had reverted to the end of year stance. Rates likely to rise more slowly and by a much more limited extent than was believed just a few months earlier. Analysts and economic pundits were confused.

So what had forced the change? The preliminary estimate of growth in the first quarter has been much lower than anticipated. Growth of 1.2% had been impacted by weakness in construction activity specifically. A slow down in leisure spending hit service sector output. Zero growth in public sector spending compounded the overall problem.

The MPC had been swayed by the initial estimate. Growth forecasts for the year were reduced by the Bank from 1.8% to just 1.4%. Growth in 2019 and 2020 was relatively unchanged at 1.7%.

Should the MPC react to just one quarter figures, or should they “see through” the snow on construction sites and seek to raise rates?

The latest jobs figures suggest there is no significant weakness in the economy. Unemployment has fallen to levels not seen since 1975. Vacancies are at an all time high level. Earnings are rising averaging 2.9% in the three months to March. In the construction sector earnings increased by 4.5%.

Inflation had moderated to 2.5% in April. The Bank of England expects inflation to revert to the target 2% within the “forecast horizon”. The problem is, imported inflation is threatening the headline rate of inflation once again.

Oil price Brent Crude is testing the $80 dollar per barrel level. Sterling is falling below $1.35 against the dollar. Earnings are rising, the cost of imports is set to increase. It may take longer than expected to see further falls in inflation. CPI inflation may still hover around the 2.4% level by end of year.

As we explained, during the presentation, for the current year we expect growth of 1.5% assuming there is no real revision to the estimates of growth in the first quarter. The prospects for job growth remain strong. Government revenues will continue to improve. Public Sector Borrowing will fall albeit gradually. The deficit trade in goods will continue to deteriorate.

In construction, the strength of private sector expansion in housing and commercial real estate is evident. The weakness of public sector expansion in housing and infrastructure spending equally so. There will be no significant expansion in construction activity this year without a release of public sector spending targets.

Strong manufacturing performance is boosted by exports of capital goods to overseas markets. The strong performance in the first quarter will weaken during the course of the year.

Fears about Brexit abound. The conflict within cabinet about the customs union is frustrating for business. The sectors to be most badly hit will be automotive, aerospace, pharmaceuticals, agriculture and textiles.