Royal Bank of Scotland : Improving - Economics Weekly

Striking. What a difference a month makes. Not the football. This is an economics update after all. UK GDP grew by 0.3% between April and May, strong enough to lift the three-monthly growth rate from nothing to 0.2%. So, even very moderate growth in June, which seems likely, and the UK will match its post-2000 average of 0.4% in Q2. Anything more and it's game on. Services have shouldered most of the lifting, particularly the professions and the digital economy (ICT), aided by remarkable growth in construction. Too good to be true? Perhaps. We're back to football again.

Temporary? Contrary to market expectations of a 0.5% increase, May industrial production declined by 0.4% compared to April. A glitch in the largest oilfield (Sullom Voe) resulted in a slump in crude petroleum and natural gas production, dragging down output in the mining & quarrying sector by 4.6%. Electricity & gas output also fell 3.2% in May, on a weather-related fall in demand, good rather than bad. On the positive side, the water & waste management and manufacturing sectors performed better compared to April. Indeed, the manufacturing sector posted a 0.4% increase in May, its first rise since December 2017.

Cheers, maybe not. After declining in Q1, the 2.9% month on month growth in May's construction output brings hope. Driven primarily by the recovery of repair and maintenance work, the weak start to 2018 has begun to wane. But England's semi-final taught us celebrations can be premature. The three month on three month growth rate showed a contraction of 1.7%. Of which, new work in public sector plunged, driven by the bankruptcy of a large construction company.
Default position. The BOE's latest quarterly Credit Conditions Survey reported UK banks have increased the supply of secured credit (e.g. home loans) modestly since end-16. In contrast, the supply of unsecured debt - credit cards, store cards and car loans -, has been trimmed back over the same period. Notably, default rates on credit card lending rose markedly in Q2, with further rises expected in Q3, suggesting some consumers are feeling the strain. Still, credit demand is envisaged to rise in the coming months though the length of the interest free period on balance transfers is being scaled back significantly.

What would Trump do? The UK posted another set of fairly dismal trade figures in May, the deficit rose to £8.3bn. The cause was pretty straightforward, falling goods exports (especially cars) and rising goods imports did the damage. Services meanwhile were relatively stable. But stable is not the word to describe global trade policy at the moment. President Trump unveiled another list of Chinese imports worth $200bn against which he is proposing to levy tariffs. The Chinese authorities promised further retaliation. This looks like the point at which a trade dispute spills into an all-out trade war. Mark Carney noted last week the first round of tariffs had almost doubled the average levy on Chinese imports into the US. This new list would be roughly twice as big a change.

Delivery. They say comedy is all about timing. How's this, then? Following Trump's announcement of further tariff rises, China revealed its trade surplus with the US rose to a record in June. And although some manufacturers may have rushed to ship goods prior to the imposition of separate tariffs that took effect earlier this month, there's little prospect of the surplus materially diminishing. For now, the US is growing robustly. That'll suck in more Chinese imports. On the flip side, Chinese import growth softened, indicating slowing growth there.

Domestic focus. The Fed's semi-annual monetary report, a precursor to this week's Congress testimony by Fed Chair Jerome Powell, was upbeat about the US economy. Business investment was described as 'strong' and inflation is 'on track' though wage growth remains modest. The drag on US growth from higher oil prices is likely to be a 'small fraction' compared to a decade ago whilst the financial system is significantly more resilient. The Fed's focus clearly remains on domestic factors, keeping the Fed on track for further gradual rate hikes in coming months.

Showing up. US inflation hit a six-year of 2.9%y/y in June. Underlying price pressures edged a little higher, too, with the core rate, which excludes energy and food prices, rising to 2.3%y/y from 2.2%. That'll keep the Fed on the tightening path. Separately, the producer price index showed that the steel and aluminium tariffs, which took effect on 1 June, have started putting some pressure on input costs. In some form or another, that'll feed through to higher prices for consumers.

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