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Saturday 29th April 2017
Hi Friend,
Strong growth continues in first quarter ...
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The preliminary estimate for GDP in the first quarter of the year was released on Friday. The headline from the ONS was "the slowest rate of growth since" ... last year. UK GDP was estimated to have increased by just 0.3% in the quarter, compared to the prior three months. Growth is slowing according to most lead headlines today in the business pages today. But is it?
As readers of The Saturday Economist know, we prefer to look at the year on year growth rates and not the quarter on quarter comparison. Recent quarter data is adjusted far too often to be reliable as a quick snap guide. The year on year growth rate for manufacturing was 2.8%. The year on year growth rate for production output was 2.5%. The year on year growth rate for services was 2.5%. Construction output increased by 1.9%. The weighted growth rate for the economy as a whole in the first quarter of the year must have been 2.4%. A growth rate of 2.4% compares to growth of just 1.8% in 2016.
Manufacturing output is boosted by strong output in the car sector. Strong growth is reflected in the fall in government borrowing. The ONS overall growth figure (year on year) as published is just 2.1%. That's a statistical impossibility given the strong contribution from production, services and construction accounting for 99% of total output. Strong growth continues into the first quarter of the year. We expect growth of between 2% and 2.4% for the year as a whole. US growth in the first quarter was 1.9%. Sterling is rallying against the Dollar as the reality of a rate hike in the UK is dawning and the prospects for Fed rate hikes is waning ...
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In other news this week ...
Government Borrowing falls to £52 billion in 2016/17
Government borrowing fell to £52 billion in the financial year down by £20 billion from prior year. Public Sector Net Debt was £1.73 trillion, up by £123.5 billion in the period equal to 86.5% of GDP.
Current receipts increased by 6% in the period boosted by strong growth in income tax and NIC contributions. VAT revenues were relatively modest given the low inflation outlook over the twelve months. Current spending increased by just 2% over the period. The Treasury has secured a prime fiscal surplus based on current revenue and spending outurns.
So what of the years ahead? The OBR expects borrowing in the current financial year to increase to £58 billion, thereafter reducing to £41 billion in 2018/19. Given the drive to achieve an overall surplus in the next parliament, there will be little to give away in the Tory manifesto, although a further five year mandate will extend the timetable slightly if required. As it is, government borrowing could be eliminated within four years.
Best month since 2000 for UK car manufacturing ...
Exports continue to drive British car manufacturing in March as demand increased by 11% in the month according to the latest data from the SMMT. Overseas demand, accounting for over three quarters of sales, helped to push overall production to a 17 year high as output hit 471,695 units.
Mike Hawes, Chief Executive said, "UK car manufacturing is accelerating thanks to the billions of pounds of investment committed over the last few years. Much of our output goes to Europe and it is vital we maintain free trade between the UK and the EU or we risk destroying this success story."
1.7 million cars were built in the U.K. in 2016 of which 70% were exported to the EU and the rest of the world. Output in 2017 is expected to increase to 1.8 million units as growth in the World and European economies continues. Car production and sales are interconnected with the EU. Motor, aerospace, finance and big pharma are the sectors most at risk from a "hard" exit. Negotiators would be wise to heed the Hawes call ...
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White House reveals dramatic tax plan ...
The White House revealed the long awaited Trump tax plan this week. A dramatic plan to overhaul the tax code presents a major test for the President claimed The Washington Post. It's "The most ambitious legislative initiative to date". Excellent.
It was a bit short on detail. The one page, 200 word document contained just seven numbers. Seven tax bands would be cut to three. The start point for basic relief would double. The married couple's allowance would increase from $12,600 to $24,000 and corporation tax would be cut by 50%. Small businesses and owner run businesses would pay a basic tax rate of just 15%. The Easter Bunny must have had a key rôle in the draft.
The plan did not explain by how much Federal revenue would be cut or the deficit would be increased. The outline failed to list the trigger levels for the new tax brackets. The goal, said White House officials was to cut taxes by so much and so fast, it would lead to economic growth, creating new jobs and producing trillions of dollars in new revenue and wealth in the process. It doesn't add up.
The Committee for a Responsible Federal Budget suggests the plan would lead to a loss of $5.5 trillion in revenues over the next ten years. The impact on borrowing and debt would be enormous. A fiscal stimulus of this size would lead to a surging trade deficit, dollar collapse and rising inflation.
"We
expect trillions of dollars will come back on shore and will be
reinvested here in the United states for capital goods and job creation"
said Steven Mnuchin ex Goldman Sachs and Secretary to the Treasury in
the Trump administration. Really?
The plan for a tax free "holiday" to repatriate overseas corporate earnings into the USA, far from leading to an increase in investment and job growth, would be more likely lead to dividend payments, share buy backs and corporate debt restructure.
The plan, if such it is, faces a big battle through Congress challenged by Democrats and Republicans alike. Once again it has the hallmark of a hastily put together, ill conceived plan. Think of it more like a "Children's Coloring Book" now passed to the adults to add in detail and shades with hues of left and right. One page and seven numbers a reflection of the attention span of the President. The "most ambitious legislative initiative to date" is far too short on detail to be worthy of the claim.
In other news this week, the USS Carl Vinson has been located somewhere near Japan; the plan to penalise the sanctuary cities has stalled in court; Trump slapped a 20% tariff on Canadian softwoods; Plans for the Mar-A-Lago tree house are on hold as is the commitment to leave NAFTA. The Fed government won't shut down this week, it has a seven day extension. Don't miss our updates on life in the White House! It moves at such a pace!
Oh yes and this week Trump admitted to Reuters, "This [being President] is more work than in my previous life. I thought it would be easier". Well, who would have thought ...
That's all for this week from The West Wing, Whisky, Tango, Foxtrot ... You can check out the series of blog posts here
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So what happened to Markets?
The Dow closed at 20,950 from 20,566. The FTSE closed at 7,224 from 7,114.
Sterling was up against the Dollar to $1.294 from $1.279 and was down against
the Euro to €1.187 from €1.197. The Euro moved up against the Dollar to 1.089 from 1.068.
Oil Price Brent Crude closed at $51.64 from $51.72. The average price in April last year was $41.58.
UK Gilts
- yields moved up. UK Ten year gilt yields closed at 1.10 from 1.05. US
Treasury yields moved up to 2.32 from 2.25. Gold closed at $1,269 from $1,286.
John
That's all for this week. Don't miss our economics update at PwC Manchester on the 18th May. It's usually a sell out so make sure you book now!
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