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Saturday 21st July 2018
Hi Friend,
Borrowing Falls ... A Chancellor Smiles ...
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| Government Borrowing fell in the month of June compared to prior year. Strong receipts, a tight hold on spending and a reduction in the monies paid to Brussels helped to reduce the pressure on Treasury coffers.
In the month, borrowing was just £5.4 billion compared to £6.2 billion in 2017. In the first quarter, the cumulative total was £16.8 billion compared to £22.2 billion in the same period last year.
The Chancellor is on track to reduce borrowing in the financial year to £30 billion, compared to £39 billion last year. It hasn't been so low for over fifteen years. The OBR were forecasting £37 billion this year, leading some to suggest the Chancellor has £7 billion to give away in the Autumn budget.That's nonsense of course.
The economics decision would be to hold the line and continue to eliminate borrowing. Let's not forget we have some £1.8 trillion of government debt outstanding. That's about 85% of GDP. The political decision may be to ease spending gradually but in the midst of the Brexit confusion, such political gestures would be futile.
The Chancellor would be better advised to hold tight for the moment. There may be worse problems to come, if a hard Brexit is the outcome of talks with Johnny Foreigner ...
"Unemployment Steady, Earnings Fall ..."
What to make of an economy in transition? The unemployment was 4.2% in the three months to May. The number of unemployed was just over 1.4 million. The number of vacancies increased to 814,000 in the three months to June. Recruitment difficulties in service sector leisure are evident. Earnings eased back in the latest data. In May the average level of earnings was just 2.5% down from 2.6% prior month.
The economy appears to be stalling if the job figures are a guide. The improvement in the government deficit is more a function of austerity and a Brussels bonus, than the underlying strength of the UK economy. We expect the jobs data to trade sideways over the rest of the year.
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| Retail Sales and Inflation ...
Retail sales in the month of June increased by almost 3% in volume terms and by 5.3% in value. In the second quarter of the year the value of retail sales increased by 5% compared to 4% in the first quarter. Too easy to trot out nonsense of a squeeze on household incomes and spending, consumers are out there with credit cards and pushing those pin numbers.
It is the pattern of retail sales which overhangs the high street. Smaller retail footprints, the importance of multi channel. Rapid response turn round especially in the fashion sector. The dinosaurs are ageing in the face of an online challenge.
Online sales volumes increased by 14% accounting for 18% of all retail sales in June. 25% on line penetration seems feasible within the next five years. Textiles, clothing and footwear will lead the way.
"Inflation steady in June CPI holds at 2.4%"
Oil prices Brent Crude basis averaged $74.4 dollars in the month of June. That's a 64% increase on prior year. The pressure on manufacturing prices was evident. Input costs for converters increased by 10% in the month. Output costs increased by 3.1%. The largest component in the rise was of course, fuel and energy costs. So what happens for the rest of the year? Assuming oil prices stay at current levels, the inflation impact will mitigate to around 30% in the third quarter and 20% in the final quarter. We expect input costs to ease to around 6.5% by the end of the year. Output costs will fall to around 2.7%.
CPI inflation held at 2.4% in the month. Goods inflation eased up to 2.6% but service sector inflation was just 2.3%. For the rest of the year we expect inflation to remain above target. Soft data on earnings and inflation will allow the MPC to avoid a rate rise next month. We expect CPI inflation to be 2.4% by end of year.
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| Chaos on Trade ...
Chaos on Trade. Trump is on the case. The meeting in Helsinki with Putin went very well. So much so, Trump intends to invite Putin to the White House in the Autumn. Putin will also be invited to an interview with Mueller and the FBI presumably. That together with a holiday stop over in Cuba on the way home to review facilities at Guantanamo Bay.
The American History Association issued a statement about George Washington and the Cherry tree job. George Washington was misspoke. When he said " I cannot tell a lie I did cut it down with my hatchet" He had meant to say, "I can tell a lie I did not cut it down with my hatchet". Truth will out in the end. The moral of the story, never give a six year old a hatchet for his birthday. And never give a moron a job in the White House.
Trump is creating chaos on trade. Tariffs on Chinese products have now been extended to some $200 billion of items and may be extended to all Chinese imports. China is the enemy along with Canada, Mexico, Japan and Europe. Putin is a mate. "He even gave me a football." Better test for bugs and bias in the bounce. Back in the US, manufacturers from Harley Davidson to Alcoa are bracing for the shock a world wide tariff war will create.
The IMF and the WTO have warned of the shock to trade and world growth if the problems persist. Jerome Powell head of the Fed has also warned of the dangers. Trump is displeased and has now moved on the Fed with his latest pointers on how to run monetary policy. "I am not thrilled" "I am not happy about it". The Fed rate hikes are putting pressure on the Dollar moving higher against the Renminbi and the Euro. Yes that could increase the trade deficit! By convention the White House avoids comments on monetary policy. Trump is unabashed ..
"So somebody would say, 'Oh, maybe you shouldn't say that as president.' I couldn't care less what they say, because my views haven't changed". Really? In 2016 Trump berated Janet Yellen for creating a false market in shares by keeping rates artificially low. A contradiction? perhaps, or maybe he was just misspoken ...
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| Don't Miss Our Monday Morning Markets ...
Earlier this month we launched our Monday Morning Markets. It's a review we developed for Duff & Phelps some years ago. Time to bring it back now on our own book. The update will be released every Monday Morning at around 8:00am.
We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. It's just for fun. We are not licensed for the giving of investment advice.
That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data.
Have a great weekend.
John
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