PERSPECTIVES. US monetary policy tightens as global growth moderates. Introduction: the Fed raises rates again

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1 PERSPECTIVES By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group US monetary policy tightens as global growth moderates Ruth Lea Economic Adviser Arbuthnot Banking Group nd January 2019 Introduction: the Fed raises rates again As expected, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate (the rate banks charge each other for overnight loans of federal funds, which are reserves held by banks at the Fed) by 25bp to % at the December meeting (see annex table 1, Central Bank watch). 1-3 The FOMC explained their reasoning as follows: 4 The labor market has continued to strengthen and economic activity has been rising at a strong rate. Moreover, both inflation and core inflation remained near 2% (YOY). Note that the unemployment rate was 3.7% in November, a 49-year low. The FOMC judged that some further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee s symmetric 2% objective over the medium term. In view of labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to %. US interest rates have already been increased several times since their recent nadir of % (set in December 2008). Additionally, the Fed announced in September 2017 that it would start to reduce its asset holdings ( quantitative tightening ). 5-6 Moreover, the Fed is still projecting further rate rises in 2019 and 2020, despite some more dovish indications from Fed Chairman Jay Powell in November. At that time he suggested rates were then just below estimates of neutral, less than two months after he said they were probably a long way from that point. 7 Specifically, the Fed is now projecting a further 50bp increase by end-2019 with a further 25bp increase by end-2020 (see table 1 below). But note that these projections are slightly more dovish than in September 2018, when a 75bp increase had been projected for This modified stance partly reflected the Fed s updated growth and inflation forecasts. GDP growth is now forecast to be 2.3% in 2019 (2.5% in September) and consumer prices inflation is forecast to be 1.9% in 2019 (2.0% in September). See annex table 2 for details. 1

2 Jan, 2008 May, 2008 Sep, 2008 Jan, 2009 May, 2009 Sep, 2009 Jan, 2010 May, 2010 Sep, 2010 Jan, 2011 May, 2011 Sep, 2011 Jan, 2012 May, 2012 Sep, 2012 Jan, 2013 May, 2013 Sep, 2013 Jan, 2014 May, 2014 Sep, 2014 Jan, 2015 May, 2015 Sep, 2015 Jan, 2016 May, 2016 Sep, 2016 Jan, 2017 May, 2017 Sep, 2017 Jan, 2018 May, 2018 Sep, 2018 Table 1 Federal funds rate (%), Fed s projections, mid-points End 2018 End 2019 End 2020 End 2021 Longer-run December % 2.7% 3.1% 2.8% March % 2.9% 3.4% 2.9% June % 3.1% 3.4% 3.4% 2.9% September % 3.1% 3.4% 3.4% 3.0% December % 2.9% 3.1% 3.1% 2.8% Sources: Federal Reserve System website, December 2018 and previous forecasts. knocking stock markets Stock markets fell sharply in the wake of the Fed s December hike in interest rates, though by the end-december they had partly recovered. 8 But, more generally, the Fed s moves towards some interest rate normality, allied with quantitative tightening, are leading to major corrections in equity markets, though other factors, including moderating global growth and the US-China trade war, have contributed to bearish sentiment. As charts 1a and 1b show equity prices in both the US and the UK have significantly increased since the lows in early 2009 as the central banks ultra-accommodative monetary policy supported rising asset prices. Between January 2009 and September 2018, the S&P500 increased three-anda-half-fold. Moreover, the S&P500 is clearly still well above its average levels of the last decade, despite the sharp (15%) correction between September and December The increase in the FTSE100 between February 2009 (its local low point) and July 2018, the FTSE100 more than doubled. There has been a similar sharp correction (nearly 15%) since then. Please note these data are end-month data. FTSE s 2018 daily peak was 7877 on 22 May, whilst the S&P500 s 2018 peak was 2927 on 21 September. Chart 1a S&P500, end-month data, end-january 2008 to end-december S&P500 2

3 Jan, 2008 May, 2008 Sep, 2008 Jan, 2009 May, 2009 Sep, 2009 Jan, 2010 May, 2010 Sep, 2010 Jan, 2011 May, 2011 Sep, 2011 Jan, 2012 May, 2012 Sep, 2012 Jan, 2013 May, 2013 Sep, 2013 Jan, 2014 May, 2014 Sep, 2014 Jan, 2015 May, 2015 Sep, 2015 Jan, 2016 May, 2016 Sep, 2016 Jan, 2017 May, 2017 Sep, 2017 Jan, 2018 May, 2018 Sep, 2018 Chart 1b FTSE100, end-month data, end-january 2008 to end-december FTSE100 Source: Historical prices, monthly data, Global growth is slowing As we have discussed recently, there is little doubt that global growth is moderating but reasonable growth is still expected to continue in 2019, with few expectations of recession. 9 All the recent forecasts from the major forecasting organisations broadly take this view. In November the OECD, for example, warned the world economy was facing rising risks. These risks reflected increased US-China trade tensions (with higher tariffs, more below), coupled with the withdrawal of fiscal and monetary stimulus, including higher interest rates. 10 But it was still expecting global growth of 3.5% in 2019, with the US growing at 2.7%, China at 6.3% and the Eurozone at 1.8% (chart 2). 11 On the balance of probabilities, these forecasts could be too optimistic, recent data have tended to be revised down. 12 But they would have to be very overoptimistic for growth to stall or, even worse, reverse. Chart 2 OECD GDP forecasts (November), growth rates (%), selected economies Source: OECD, Economic Outlook, Global growth is slowing amid rising trade and financial risks, 21 November

4 As already indicated, the OECD assessed that US-China trade tensions were already harming global GDP and trade, warning that if the US hikes tariffs on all Chinese goods to 25%, with retaliatory action being taken by China, world economic activity could be notably weaker. The main developments to date in the US-China trade war are listed in annex table Table 2 lists the US s imports of goods from China (totalling $506bn in 2017) and China s imports of goods from the US ($130bn in 2017) which have already had tariffs applied (or threatened). They are clearly extensive and, potentially, comprehensive. It is notable, incidentally, that China depends far more on its exports to the US than the converse. China s exports of goods to the US accounted for 4.2% of their GDP in 2017, whilst the US s exports of goods to China accounted for only 0.7% of US GDP. 14 There are grounds for believing the OECD s worst case scenario is highly unlikely to happen. The US agreed on 1 December to postpone the planned increase in tariff rates on the 200bn of imports (applied on 24 September) from 10% to 25% (annex table 3), with the White House stating both parties would immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft. Moreover, there have recently been further conciliatory Sino-US sentiments, suggesting an escalation in the trade war is unlikely. 15 There is fair chance the US-China trade war will abate in 2019, Trump having made his point about intellectual property protection and market access. Table 2 US-China trade war, tariffs applied/threatened to goods imports US imports of goods from China China s imports of goods from US [China s exports of goods to US] [US s exports of goods to China] Tariffs already applied in $53bn $50bn 2018 Tariffs, took effect on 24 $200bn $60bn September 2018 Threatened tariffs $267bn Addendum items: Total goods trade (2017) $506bn $130bn Trade/US GDP (2017) 506/19,485 = 2.6% 130/19,485 = 0.7% Trade/China s GDP (2017) 506/12,014 = 4.2% 130/12,014 = 1.1% Source: (i) BBC, A quick guide to the US-China trade war, 25 October 2018; (ii) IMF for GDP data, October Finally, the OECD remained fairly downbeat about the UK s prospects, with growth of just 1.3% (2018), 1.4% (2019) and 1.1% (2020). Moreover, this projection assumed that the UK and the EU come to an agreement on the withdrawal conditions and the transition period in the near term, but only define the broad contours of the future trading relationships. According to the OECD a No Deal Brexit, trading under WTO rules, could reduce GDP by more than 2% over two years - approximately 40bn. 16 But the OECD have a record for being over-pessimistic about Brexit and their estimates should be treated with caution. 4

5 Jan, 2014 Mar, 2014 May, 2014 Jul, 2014 Sep, 2014 Nov, 2014 Jan, 2015 Mar, 2015 May, 2015 Jul, 2015 Sep, 2015 Nov, 2015 Jan, 2016 Mar, 2016 May, 2016 Jul, 2016 Sep, 2016 Nov, 2016 Jan, 2017 Mar, 2017 May, 2017 Jul, 2017 Sep, 2017 Nov, 2017 Jan, 2018 Mar, 2018 May, 2018 Jul, 2018 Sep, 2018 Nov, 2018 However, it is not unreasonable to anticipate some Brexit (due on 29 March 2019) related disruption which could impact on GDP growth, especially in the case of a No Deal Brexit. Affected businesses will have to adapt to changed circumstances and there may be knock-on effects for business and consumer confidence. GDP may slip back in one or two quarters. (The technical definition of a recession is two consecutive quarters of falling output.) But this would probably be temporary, barely deserving of the word recession, with relatively little impact on unemployment. Therefore, a recession in the sense of a prolonged hit on GDP with a significant negative impact on the labour market, as in the mid-1970s, early-1980s, early-1990s and the Great Recession, remains unlikely. 17 knocking oil prices Oil prices firmed in the second half of 2017 and into 2018 on production restrictions and rising global demand (chart 3). There was a further kick to oil prices on supply concerns when President Trump pulled out of the Joint Comprehensive Plan of Action (JCPOA) with Iran in May 2018, announcing the re-imposition of US sanctions. Brent peaked at over $86pb on 3 October. Prices have, however, weakened since then reflecting a combination of factors. Demand appears to be moderating on weaker-than-anticipated global economic growth and, in November, the US took measures to allow some of Iran s biggest customers to continue importing its oil without violating the US sanctions against Iran ( sanctions waivers ) On the supply side, US shale production has boomed, contributing to inventory build-up. OPEC s December decision (with non- OPEC participants) to cut production from January 2019 has not, so far, halted the slide in prices. 20 Chart 3 Brent crude futures, $ per barrel, end-month data, end-january 2014 to end-december Brent oil Source: Brent crude futures historical prices, monthly data, December 2018, provisional. 5

6 UK update: no revision to GDP growth for 2018Q3 In the last fortnight, there have been the usual batch of economic releases (see economic data tracker, annex table 4). The ONS confirmed that GDP grew by 0.6% (QOQ) in 2018Q3, bolstered by a firm 0.5% increase (QOQ) in household expenditure (in turn boosted by the World Cup and the hot weather in July). 21 A notable weakness in household spending was a fall in spending on motor cars, which is consistent with some weaker figures for the car industry produced by the Society of Motor Manufacturers and Traders (SMMT) Of the other expenditure components, gross fixed capital formation (GFCF) rose 0.5% (QOQ), with the largest contribution coming from general government. Business investment, however, fell 1.1% (QOQ), marking the third consecutive quarterly fall. 24 But the recent fall in business investment should be kept in perspective. It was estimated to be a modest 1.8% down (YOY). Of particular interest were the ONS s revisions to the GDP growth contribution of net trade (goods and services). Whilst it made a positive contribution (in volume terms) in 2018Q3, with a 1.1% rise in exports more than offsetting a 0.8% rise in imports, the contribution was revised down very significantly. It is now estimated to have contributed just 0.1 percentage points to GDP growth in 2018Q3, revised down from the previous estimate of 0.8 percentage points. (The revisions mainly reflected updated estimates of unspecified goods, which contain non-monetary gold.) The ONS more generally noted that the cumulative effect of revisions to net trade since 2017Q1 has led to there being less external rebalancing since voting to leave the EU than previously estimated. This is disappointing, and surprising given the fall in sterling since mid-2016, to say the least. On the output measure, all three sectors contributed positively to GDP growth in 2018Q3. The dominant services sector rose 0.5%, whilst production was 0.6% higher and construction continued its recovery after a weak start to the year, growing by 2.3% (QOQ). but disappointing balance of payments data There was more disappointing news on the external aside of the economy from the balance of payments accounts for 2018Q3. 25 The current account deficit widened to a worse-than-expected 26.5bn (4.9% of GDP) in 2018Q3, compared with 20.0bn (3.8% of GDP) in 2018Q2. The deficit in 2018Q3 was the largest deficit recorded since 2016Q3 in both value and percentage of GDP terms. All of the main components contributed to the deteriorating current account balance, with worsening trade, primary income (mainly investment income) and secondary income (current transfers) balances. Note the trade balance actually deteriorated in 2018Q3 in current prices, whilst it had improved marginally in volume terms (see GDP, above). Early indicators for 2018Q4 Whilst it is widely expected that UK growth will be slower in 2018Q4 than 2018Q3, there remains a considerable spectrum of views as to what that growth will be. Markit has estimated that the surveys are so far consistent with 0.1% growth in 2018Q4, thanks to the expansion seen in October, but growth momentum has since been lost and risks are clearly tilted to the downside, whilst NIESR s GDP tracker suggested 0.4% (QOQ) growth in 2018Q4, after the 0.6% (QOQ) rise in 2018Q3. 26 The Bank s latest estimate is for 0.2% growth in the quarter (see below). 6

7 Whilst caution is required, the recently released data suggest an outcome closer to NIESR than the Bank. Specifically, retail sales jumped by a greater-than-expected 1.4% (MOM) in November, to be 3.6% up (YOY), with growth of 5.3% in household goods stores. 27 However, the ONS noted that retailers reported strong growth on the month due to Black Friday promotions in November, which continues the shifting pattern in consumer spending to sales occurring earlier in the year. Such shifting patterns can be deeply deceptive as to the underlying growth in retail sales. The public finances data for November were also encouraging, after October s disappointment. 28 Public sector net borrowing (PSNB-ex, excluding public sector banks) recorded a deficit of 7.2bn in November 2018, compared with a deficit of 8.1bn in November This was the lowest November borrowing for 14 years (since 2004). Central government receipts in November 2018 increased by 3.8% (YOY), while total central government expenditure were 3.7% higher. The PSNB so far for FY2018 (April to November) was 32.8bn, the lowest year-to-date net borrowing for 16 years (since 2002), compared with 46.4bn for the first eight months of FY2017. The OBR forecast public borrowing of 25.5bn for FY2018, compared with an outturn of 41.5bn for FY2017, for the Autumn (October 2018) Budget. There is a good chance the OBR s forecast will be met. The latest inflation data were also positive. The CPI rate was 2.3% in November, down on October s 2.4%, reflecting falling petrol prices, whilst CPIH inflation was unchanged at 2.2% in November. 29 Given the weakness of oil prices, CPI inflation can be expected to ease further in 2019, supporting the growth in real annual average earnings. Concerning the producer price index (PPI), both output PPI inflation and the input PPI inflation slipped back in November. 30 The UK housing market, however, continues to weaken overall. According to official data, UK house prices increased by 2.7% (YOY) in October, down from September s 3.0%. 31 The ONS commented that this was the lowest annual rate since July 2013 when it was 2.3%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England. The lowest annual growth was in London, where prices fell by 1.7% (YOY) in October. The ONS also pointed out that negative house price growth in London is driven primarily by inner London, for which annual house price growth has been consistently negative since January In October, prices fell 2.9% (YOY) in inner London, whilst they slipped by just 0.2% (YOY) in outer London. Finally, no change from the Bank The Monetary Policy Committee of the BoE left monetary policy unchanged, as expected, at their December meeting. 32 Specifically, the MPC members voted unanimously for: the Bank Rate to stay at 0.75%; the Bank to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at 10bn; and the Bank to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at 435bn. As with the ECB, the BoE has ended QE but has not yet initiated quantitative tightening. The Bank s statements contained no major surprises, but the following observations are worth noting: Brexit uncertainties had intensified considerably since the MPC s November meeting, whilst this further intensification of Brexit uncertainties, coupled with the slowing global economy, 7

8 had weighed on the near-term outlook for UK growth. 33 The decline in oil prices meant CPI inflation was likely to fall below 2% in coming months. The Bank was now forecasting GDP growth of 0.2% (QOQ) in 2018Q4, compared with 0.3% expected in the November Report. Any interest rate moves would be dependent on the nature of Brexit. Given a smooth exit, and the economy developing broadly in line with the Bank s November Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The Bank appears to be in no hurry to raise rates and it remains likely that there will be just one increase in the Bank Rate in to 1.0%. Brexit update There were few UK developments over the past fortnight: The meaningful vote in the House of Commons on the Withdrawal Agreement, postponed from 11 December, is still expected to take place after the Commons returns after its Christmas break on 7 January. It is now expected to take place week beginning 14 January. If no deal is agreed by 21 January, the government is obliged to make a statement setting out its subsequent Brexit plans. A No Deal Brexit is the default position if the deal is rejected by the Commons. It was reported that the cabinet had decided to ramp up preparations for a No Deal Brexit, provisionally allocating to ministries 2bn if No Deal. 34 Apparently, letters would be sent to 140,000 firms updating them on what they should do whilst 3,500 troops would be put on standby to help government departments. In addition, the European Commission announced the implementation of its No Deal Contingency Action Plan in specific sectors This development delivered the Commission s commitment to adopt all necessary no deal proposals by the end of the year, as outlined in its second preparedness Communication of 13 November The measures are outlined in the annex table 5. They principally covered: citizens rights, financial services, transport (air and road), and climate policy. 39 The Commission called on the European Parliament and the Council to ensure the adoption of the proposed legislative acts so that they are in force by 29 March The Commission also highlighted to the European Parliament and the Council that it was important for delegated acts to enter into force as rapidly as possible. 8

9 References 1. Federal Reserve, Federal Reserve issues FOMC statement, 19 December Federal Reserve, Federal Reserve Board and Federal Open Market Committee release economic projections from the December FOMC meeting, 19 December BBC, Fed raises rates despite Trump opposition, 20 December Federal Reserve, Federal Reserve issues FOMC statement, 19 December FT, US Federal Reserve calls historic end to quantitative easing, 20 September Ruth Lea, The ECB ends QE despite a slowing Eurozone economy, Arbuthnot Banking Group, 17 December Note the ECB has ended QE, but has not initiated quantitative tightening. 7. Daily Telegraph, US rate hikes to end soon, hints Fed, 29 November BBC, US markets mixed after turbulent week, 28 December Ruth Lea, The world economy is slowing and growth forecasts are revised down, Arbuthnot Banking Group, 3 December OECD, Economic Outlook, Global growth is slowing amid rising trade and financial risks, 21 November Ruth Lea, The world economy is slowing and growth forecasts are revised down, Arbuthnot Banking Group, 3 December 2018, discussed the OECD forecasts in more detail. 12. Daily Telegraph, Lower GDP growth in USA & France points to global slowdown, 22 December 2018, reported French GDP growth was revised down to 0.3% (QOQ) from 0.4% for 2018Q3, whilst US GDP growth was revised to 3.4% from 3.5% (annualised) for 2018Q Wikipedia, 2018 China United States trade war. 14. Ruth Lea, The OECD-WTO trade in value-added research: a break-through in analysing world trade, Arbuthnot Banking Group, 17 February 2014, suggested that exports in value added-terms were less significant to the Chinese economy than exports in balance of payments terms. 15. BBC, China says it is ready to work with US, 31 December Daily Mail, No deal Brexit could wipe 40bn off the UK s economic growth in just two years, international think tank warns, 21 November 2018, discussed the OECD warnings. 17. Ruth Lea, The past four UK recessions compared, and no recession expected on Brexit, Arbuthnot Banking Group, 10 September CNBC, US crude tumbles 1.4%, settling at $62.21, after briefly entering bear market, 5 November BBC, Trump administration to reinstate all Iran sanctions, 3 November 2018, discussed the temporary waivers. 20. OPEC, The 5 th OPEC and non-opec Ministerial Meeting concludes, 7 December ONS, GDP quarterly national accounts: 2018Q3, 21 December SMMT, Modest -3.0% decline for November UK new car market, 5 December The fall reflected uncertainty, falling consumer confidence and supply constraints. 23. SMMT, Serious decline for British car manufacturing in November, 21 December The decline reflected weaker UK demand and the effects of the ongoing impact of new regulation alongside planned model and technology changes. 24. ONS, Business investment in the UK: 2018Q3 revised results, 21 December ONS, Balance of payments, UK: 2018Q3, 21 December Ruth Lea, The ECB ends QE despite a slowing Eurozone economy, Arbuthnot Banking Group, 17 December 2018, discussed these UK forecasts in more detail. 9

10 27. ONS, Retail sales, GB: November 2018, 20 December In November 2018, online sales as a proportion of all retailing exceeded 20% for the first time, with all online retailing accounting for 21.5% of total retailing on a non-seasonally adjusted basis. 28. ONS, Public sector finances, UK: November 2018, 21 December ONS, Consumer price inflation, November 2018, 19 December ONS, Producer price inflation, November 2018, 19 December ONS, UK house prices index, October 2018, 19 December The UK s four countries continued to show different inflation rates in October: England (2.4% (YOY)), Wales (3.8%), Scotland (4.4%) and Northern Ireland (4.8% (2018Q3)). In England, there was, as always, a significant range across the regions: North West (4.9%), Yorkshire & Humberside (4.4%), East Midlands (4.3%), West Midlands (3.8%), South West (2.1%), East (2.1%), South East (1.5%), North East (-0.1%), and London (-1.7%). 32. Bank of England, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 19 December 2018, 20 December CNBC, Bank of England warns Brexit uncertainty has intensified considerably, 20 December BBC, Brexit: Cabinet ramps up no-deal planning, 18 December BBC, Brexit: EU reveals no-deal plans, 19 December European Commission, Brexit: European Commission implements no-deal Contingency Action Plan in specific sectors, press release, 19 December European Commission, Preparing for the withdrawal of the UK from the EU on 30 March 2019: implementing the Commission s Contingency Action Plan COM/2018/890 final, 19 December European Commission, Preparing for the withdrawal of the UK from the EU on 30 March 2019: a Contingency Action Plan COM/2018/880 final, 13 November Daily Telegraph, Brussels steps in a last minute with crucial recognition of UK derivatives for next year, 20 December 2018, covering changes in legal provisions, guaranteeing derivatives contracts. 10

11 Annex Table 1 Central Bank watch Central Bank Bank of England (BoE). European Central Bank (ECB). Federal Reserve System (Federal Reserve, the Fed). Monetary policy committee Monetary Policy Committee (MPC) sets monetary policy, including Bank Rate Governing Council sets monetary policy, including 3 key interest rates. Federal Open Market Committee (FOMC) sets monetary policy, by targeting the federal funds rate. Monetary policy meetings for Feb; 21 March; 2 May; 20 June; 1 Aug; 19 Sep; 7 Nov; 19 Dec. 24 Jan; 7 March; 10 April; 6 June; 25 July; 12 Sep; 24 Oct 12 Dec Jan; March; 30 April-1 May; June; July; Sep; Oct; Recent monetary policy history Bank Rate (base rate): interest rate BoE charges commercial banks for secured overnight lending. Main refinancing operations (MRO) interest rate, which provide the bulk of liquidity to the banking system Deposit facility rate, which banks may use to make overnight deposits with Eurosystem [comprises ECB & 19 central banks of Eurozone members] Marginal lending facility (MLR) rate, which offers overnight credit to banks from Eurosystem Non-standard monetary policy measures: net purchases under asset purchase programme (APP): Until end-sep 2018: monthly pace of 30bn. Oct-Dec 2018: monthly pace cut to 15bn. After Dec 2018: no net purchases. Federal funds rate: rate banks charge each other for overnight loans of federal funds (reserves held by banks at the Fed), set by the market. Note the discount rate is the rate for discount window lending 0.5% (5/3/09); 0.25% (4/8/16); 0.5% (2/11/17); 0.75% (2/8/18) 0.0% (16/3/16) -0.40% (16/3/16) 0.25% (16/3/16) % (16/12/08); % (17/12/15); % (14/12/16); % (15/3/17); % (14/6/17); % 11

12 10-11 Dec. (overnight loans member banks borrow directly from the Fed). March, June, Sep, Dec meetings with Summary of Economic Projections & press conference Fed s end-year projections for the federal funds rate (Dec 2018) (13/12/17); % (21/3/18); % (13/6/18); % (26/9/18); % (19/12/18) 2018 (2.4% (2.25%- 2.5%)); 2019 (2.9% (2.75%- 3.0%)); 2020 (3.1% (3.0%- 3.25%)); 2021 (3.1%); Longerrun (2.8%) Sources: (i) Bank of England website; (ii) ECB website; (iii) Federal Reserve System website. Table 2 Federal Reserve: projections, December 2018, median estimates Longer-run GDP % change, Q4 (YOY): September December Unemployment rate, Q4 (%): September December PCE inflation (%), Q4 (YOY): September December Core PCE inflation (%), Q4 (YOY): September Na December Na Projected appropriate policy path, Federal funds rate (%), end-year: September % 3.1% 3.4% 3.4% 3.0% December % 2.9% 3.1% 3.1% 2.8% Sources: Federal Reserve website, projections for 19 December PCE = personal consumption expenditures, core excludes food & energy. The Federal funds rate is the midpoint of the targeted range. 12

13 Table 3 Main developments in US-China trade war Date Development 22 January 2018 Trump announced tariffs on imports of solar panels and washing machines (restricted volume). 1 March 2018 President Trump imposed (generalised) tariffs of 25% on steel and 10% on aluminium. 29 May 2018 The White House announced it would impose a 25% tariff on $50bn of Chinese goods with industrially significant technology. 15 June 2018 Trump then declared that the US would impose a 25% tariff on the $50bn of Chinese exports. $34bn to start 6 July 2018, with a further $16bn to begin later (23 August). 19 June 2018 China retaliated almost immediately, threatening its own tariffs on $50bn of US goods. 17 September 2018 The US announced its 10% tariff on $200bn worth of Chinese goods would begin on 24 September 2018, increasing to 25% by end They also threatened tariffs on an additional $267bn worth of imports if China retaliated, which China promptly did on 18 September with 10% tariffs on $60bn of US imports. 1 December 2018 The planned increases in US tariffs from 10% to 25% were postponed (G20 meeting). Source: Wikipedia, 2018 China United States trade war. Table 4 UK economic data tracker Date Release Source Quarter, Outcome year 13 Nov Productivity (output per ONS 2018Q3-0.5% (QOQ), +0.1% (YOY) hour) (2018Q3, flash estimate) 13 Nov Productivity (output per ONS 2018Q3 +0.5% (QOQ), +0.4% (YOY) worker) (2018Q3, flash estimate) 29 Nov Unsecured credit (Oct) BoE 2018Q4 Growth rate (YOY): 7.5% (Oct), 7.9% (Sep) 29 Nov Secured on dwellings (Oct) BoE 2018Q4 Growth rate (YOY): 3.3% (Oct), 3.2% (Sep) 29 Nov Mortgage approvals for house purchase (Oct) BoE 2018Q4 67,086 (Oct), 65,726 (Sep), compared with 65,340 (average of previous 6 29 Nov Net bank lending to non-financial businesses (Oct), of which: months) BoE 2018Q4 Growth rate (YOY): 1.5% (Oct), 1.3% (Sep) 29 Nov Large businesses BoE 2018Q4 Growth rate (YOY): 2.5% (Oct), 2.2% (Sep) 29 Nov SMEs BoE 2018Q4 Growth rate (YOY): -0.2% (Oct), -0.2% (Sep) 13

14 3 Dec Manufacturing PMI Markit- 2018Q4 Index: 53.1 (Nov), 51.1 (Oct) (Nov) CIPS 4 Dec Construction PMI (Nov) Markit- 2018Q4 Index: 53.4 (Nov), 53.2 (Oct) CIPS 5 Dec Services PMI (Nov) Markit- 2018Q4 Index: 50.4 (Nov), 52.2 (Oct) CIPS 5 Dec New car registrations (May) SMMT 2018Q4 Nov: total (-3.0% (YOY)), of which diesel (-16.7% (YOY)) 5 Dec New car registrations (Jan-May) SMMT 2018 Jan-Nov: total (-6.9% (YOY)), of which diesel (-29.8% (YOY)) 10 Dec GDP (3 months to Oct) ONS 2018Q4 GDP: 0.4% (QOQ), 1.5% (YOY) 10 Dec GDP: industrial breakdown (3 months to Oct) ONS 2018Q4 Production: 0.3% (QOQ), 0.1% (YOY); Manufacturing output: 0% (QOQ), 0.3% (YOY); Construction: 1.2% (QOQ), 2.4% (YOY); Services: 0.3% (QOQ), 1.7% (YOY) 10 Dec GDP, monthly (Oct) ONS 2018Q4 GDP (Oct): 0.1% (MOM), 1.5% (YOY) 10 Dec GDP: industrial breakdown (Oct) 10 Dec UK trade in goods & services (3 months to Oct) 10 Dec UK trade in goods (3 months to Oct) 10 Dec UK trade in services (3 months to Oct) ONS 2018Q4 Production: -0.6% (MOM), -0.8% (YOY); Manufacturing output: -0.9% (MOM), - 1.0% (YOY); Construction: -0.2% (MOM), +3.8% (YOY); Services: 0.2% (MOM), +1.8% (YOY) ONS 2018Q4 Trade deficit: widened 3.1bn to 10.3bn ONS 2018Q4 Goods deficit: widened 1.7bn to 35.5bn ONS 2018Q4 Services surplus: fell 1.3bn to 25.2bn 10 Dec NIESR GDP tracker NIESR 2018Q4 GDP growth: 0.4% (QOQ) in 2018Q4, after 0.6% in 2018Q3 11 Dec Employment (3 months ONS 2018Q4 +79k (QOQ), +306k (YOY) to Oct) 11 Dec Unemployment (3 ONS 2018Q4 +20k (QOQ), -49k (YOY) months to Oct) 11 Dec Unemployment rate (3 ONS 2018Q4 4.1%, unchanged (QOQ), 4.3% (YOY) months to Oct) 11 Dec Vacancies (3 months to Nov) ONS 2018Q4 Total vacancies: 848k, +10k (QOQ), +40k (YOY) 11 Dec Earnings (3 months to Oct), nominal ONS 2018Q4 3.3% (YOY, regular pay, excluding bonuses), 3.3% (YOY, total pay, 11 Dec Earnings (3 months to Oct), real including bonuses) ONS 2018Q4 +1.0% (YOY, regular pay, excluding bonuses), +1.1% (YOY, total pay, including bonuses) 19 Dec CPIH (Nov) ONS 2018Q4 YOY inflation: 2.2% (Nov), 2.2% (Oct) 19 Dec CPI (Nov) ONS 2018Q4 YOY inflation: 2.3% (Nov), 2.4% (Oct) 19 Dec PPI (output) (Nov) ONS 2018Q4 YOY inflation: 3.1% (Nov), 3.3% (Oct) 14

15 19 Dec PPI (input) (Nov) ONS 2018Q4 YOY inflation: 5.6% (Nov), 10.3% (Oct) 19 Dec Crude oil prices (Nov) ONS 2018Q4 YOY inflation (sterling): -11.8% (MOM), 15.5% (YOY) 19 Dec House prices (Oct, ONS 2018Q3 YOY growth: 2.7% (Oct), 3.0% (Sep) official) 19 Dec House prices (Oct, ONS 2018Q3 0.2% (MOM, seasonally adjusted) official) 20 Dec Retail sales (Nov) ONS 2018Q4 Volume: 1.4% (MOM), 3.6% (YOY) 20 Dec Retail sales (3 months to ONS 2018Q4 Volume: 0.4% (QOQ), 3.1% (YOY) Nov) 21 Dec Public Sector Net ONS 2018Q4 7.2bn deficit (Nov 2018), compared Borrowing (PSNB) (Nov) 21 Dec Public Sector Net Borrowing (PSNB) (FY2018, to date) 21 Dec Public sector finances, public sector net debt (PSND) (Nov) 21 Dec Current Account, Balance of Payments (2018Q3) 21 Dec Trade (goods & services) with 8.1bn deficit (Nov 2017). ONS FY bn deficit (Apr-Nov 2018), compared with 46.4bn deficit (Apr- Nov 2017). ONS 2018Q4 1,795.1bn (end-nov 2018, 83.9% of GDP), compared with 1,735.8bn (end- Nov 2017, 83.9% of GDP) ONS 2018Q3 Deficit: 26.5bn (4.9% of GDP, 2018Q3), 20.0bn (3.8% of GDP, 2018Q2) ONS 2018Q3 Deficit: 8.8bn (2018Q3), 7.0bn (2018Q2). balance 21 Dec Trade (goods & services) ONS 2018Q3 Current prices (2018Q3): exports: +1.2% (QOQ); imports: +2.2% (QOQ) 21 Dec Visible trade balance ONS 2018Q3 Deficit: 35.0bn (2018Q3), 34.6bn (2018Q2) 21 Dec Services balance ONS 2018Q3 Surplus: 26.2bn (2018Q3), 27.6bn (2018Q2) 21 Dec Primary income balance ONS 2018Q3 Deficit: 11.1bn (2018Q3), 7.5bn (2018Q2) 21 Dec Secondary income balance ONS 2018Q3 Deficit: 6.6bn (2018Q3), 5.5bn (2018Q2) 21 Dec GDP (2018Q3) ONS 2018Q3 +0.6% (QOQ), 1.5% (YOY) 21 Dec GDP: output breakdown (2018Q3) 21 Dec GDP: expenditure breakdown (2018Q3) ONS 2018Q3 Services: +0.5% (QOQ). Industrial production: +0.6% (QOQ); within which manufacturing +0.4% (QOQ). Construction: +2.3% (QOQ) ONS 2018Q3 Household consumption: +0.5% (QOQ). GGFC: -0.3% (QOQ). GFCF: +0.5% (QOQ), within which business investment -1.1% (QOQ). Net contribution of net trade: +0.1% points (QOQ); exports +1.1% (QOQ), imports +0.8% (QOQ) 21 Dec Car production (Nov) SMMT 2018Q4 Nov: total (-19.6% (YOY)); home (-1.9% (YOY)), export (-22.8% (YOY)) 15

16 21 Dec Car production (2018, YTD) SMMT 2018 Jan-Nov: total (-8.2% (YOY)); home (- 16.8% (YOY)), export (-6.0% (YOY)) Sources include ONS website. Table 5 The Commission s Contingency Action Plan Main headlines Putting citizens rights first: the Communication invites Member States to take a generous approach to the rights of UK citizens in the EU, provided that this approach is reciprocated by the UK: Sector-specific regulation: Financial services: after a thorough examination of the risks linked to a no deal scenario in the financial sector, the Commission has found that only a limited number of contingency measures is necessary to safeguard financial stability in the EU27. Transport: the Commission adopted two measures that will avoid full interruption of air traffic between the EU & the UK in the event of no deal. These measures will only ensure basic connectivity and in no means replicate the significant advantages of membership of the Single European Sky. This is subject to the UK conferring equivalent rights to EU air carriers, as well as the UK ensuring conditions of fair competition. Customs & the export of goods: in a No Deal scenario, all relevant EU legislation on the importation Measures The right to stay: Member States should take measures to ensure that UK citizens legally residing in the EU on the date of withdrawal will continue to be considered legal residents. Member States should adopt a pragmatic approach to granting temporary residence status. Social security coordination: Member States take all possible steps to ensure legal certainty and to protect the rights acquired by EU27 citizens and UK nationals who exercised their right to free movement. A temporary & conditional equivalence decision for a fixed, limited period of 12 months to ensure that there will be no immediate disruption in the central clearing of derivatives. A temporary & conditional equivalence decision for a fixed, limited period of 24 months to ensure that there will be no disruption in central depositaries services for EU operators currently using UK operators. Two Delegated Regulations facilitating novation, for a fixed period of 12 months, of certain over-the-counter (OTC) derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty. The 2 measures relating to air transport are: o A proposal for a Regulation to ensure temporarily (for 12 months) the provision of certain air services between the UK & the EU. o A proposal for a Regulation to extend temporarily (for 9 months) the validity of certain aviation safety licences. The Commission also adopted a proposal for a Regulation to allow UK operators to temporarily (nine months) carry goods into the EU, provided the UK confers equivalent rights to EU road haulage operators & subject to fair competition conditions. o A Delegated Regulation to include the seas surrounding the UK in the provisions on time-limits within which entry summary declarations & pre-departure 16

17 & exportation of goods will apply to goods moving between the EU & the UK. The Commission adopted the following technical measures: EU climate policy: the Commission adopted the following acts in the area of EU climate legislation in order to ensure that a No Deal scenario does not affect the smooth functioning & the environmental integrity of the Emissions Trading System (ETS). In addition: PEACE Programme: the Commission reiterated its commitment to ensuring the current programmes between the border counties of Ireland & Northern Ireland can continue in all scenarios. declarations have to be lodged prior to leaving or entering the EU s customs territory. A proposal for a Regulation to add the UK to the list of countries for which a general authorisation to export dual use items is valid throughout the EU. It is essential that Member States take all the necessary steps to be in a position to apply the EU Customs Code & the relevant rules regarding indirect taxation in relation to the UK. A Commission Decision to suspend temporarily for the UK the free allocation of emissions allowances, auctioning, & the exchange of international credits with effect from 1 January An Implementing Decision to allow an appropriate annual quota allocation to UK companies for accessing the EU27 market (until 31 December 2020). An Implementing Regulation to ensure that the reporting by companies differentiates between the EU market & the UK market to allow a correct allocation of quotas in the future. The Commission made a proposal for a Regulation to continue the PEACE programme in Northern Ireland until the end of 2020, in the event of a no deal scenario. As for the period after 2020, the Commission has already proposed as part of its proposals for the next Multiannual Financial Framework to continue & strengthen cross-border support for peace & reconciliation in the border counties of Ireland & Northern Ireland. Other The Commission also adopted a Delegated Regulation on the listing of the UK in statistics on the balance of payments, international trade in services & foreign direct investment. Source: European Commission, Preparing for the withdrawal of the UK from the EU on 30 March 2019: implementing the Commission s Contingency Action Plan COM/2018/890 final, 19 December