ON COURSE FOR AN ECONOMIC UPTURN
According to several economic indicators, growth is likely to recover in the second quarter after falling back in the first three months of the year. The composite PMI recovered in June, driven chiefly by services.
In addition, industrial production rebounded 1.3% in May, taking it to its highest level since December 2017, and it was a similar picture for construction. Consumption data stabilised but avoided a downturn.
Against this backdrop, the unemployment rate has continued its downtrend to reach 8.4%, its lowest level since December 2008 (see the chart below).
Although drawing conclusions over inflation pressures is somewhat premature, noteworthy is that wages are growing at their fastest pace since 2010: 2.0% year-on-year. This growth in wages has not yet translated into a higher inflation rate, which at 2.0% is essentially being driven by energy prices. Inflation excluding food and energy is coming in at only 0.9%.
After the latest ECB meeting, several statements clarified that the first interest rate rises can be expected from the summer of 2019.
In Italy, the political situation does not appear to have affected the healthy level of business confidence. Market worries seem to have calmed, thanks especially to reassuring statements by Finance Minister Tria, over the implementation of reforms such as the flat tax and the citizens’ income, which in principle will be progressive.
Nonetheless, several leaders from The League and The Five Star Movement parties have been calling for faster implementation of the measures.
The League continues to gain traction in the polls and looks like it has caught up with The Five Star Movement.
In response to the United States increasing customs duties on EU steel and aluminium imports, the European Union has raised its tariffs on US imports to the value of $3.2 billion. Globally, the indicators remain consistent with a steady growth in the eurozone.
VIBRANT ECONOMIC GROWTH AND DISQUIET IN THE WHITE HOUSE
Second-quarter US economic growth is expected to rebound strongly. The improvement in consumption continues with strong retail sales for both April and May.
Industrial production has accelerated with an annual growth rate of 3.8%, its fastest since mid-2014 (see the chart below).
Investment goods orders continue their healthy uptrend, rising 6.6% year-on-year. The trade balance is also consistent with solid growth. The main disappointment in recent months has been housing starts.
Against this backdrop, job creations remain buoyant with 202,000 new private sector jobs. The upturn in the unemployment rate to 4.0% is due to a higher labour force participation rate. Weekly unemployment claims have dropped to their lowest level since 1970.
Another sign of labour market tightness is the fact that US employees are increasingly quitting their jobs, doubtless because they are finding better opportunities elsewhere. Resignation rates have accelerated in recent months and are now at their highest level since 2000.
All this good economic news has not encouraged President Trump to adopt a more conciliatory approach. The President made official 25% customs duties on $34 billion worth of Chinese products, which he is expected to follow up with a further $16 billion.
On the home front, the President broke with the tradition of not expressing any opinion on the Fed’s monetary policy when he criticised its interest rate hike decisions.
He also announced that a list of tariffs on an additional $200 billion worth of Chinese products was being drawn up, and that he was taking a closer look at European car exports. Equally, the President accused both China and Europe of currency manipulation. To summarize, in a favorable economic context, Donald Trump remains the main source of uncertainty.
Source : FactSet
INCREASING UNCERTAINTY
If no agreement is reached in the meantime, the UK will be bounced out of the EU on 1st April 2019. PM Theresa May has published the Chequers Brexit White Paper, the government’s Brexit negotiation document, which reads like a soft Brexit.
The document prompted the cabinet resignations of both David Davis (Brexit Secretary) and Boris Johnson (Foreign Secretary) as well as outrage from several hard Brexit Conservative MPs. Although Theresa May managed to cling on to her position, the outlook is stormy for September.
Signing a withdrawal agreement by the end of March 2019 would allow the UK to become a ‘third country’ whilst still applying European legislation and participating in the single market during a transition period that would run until December 2020. Failing an agreement, customs duties would apply from 1st April 2019 onwards.
This growing uncertainty could drag on an already slow UK economic environment that grew only by an annualised 0.8% in the first quarter. The second quarter is not looking like it will do any better. Although the services PMI has rebounded in the past two months, the manufacturing index is only treading water.
While inflation had started to slow between January and April 2018, slipping from 3.0% to 2.4%, it hasn’t moved since. Latest BoE statements suggest a rise in interest rates is likely at the meeting on 2nd August.
The opinion expressed above is dated 24 july 2018 and is liable to change.
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