Decision time The outlook for the UK economy, interest rates and Brexit

Transcription

1 Decision time The outlook for the UK economy, interest rates and Brexit James Knightley, Chief International Economist May 2018 THINK Economic and Financial Analysis ing.com/think

2 Decision time The Bank of England Is the economy strong enough to support another rate hike this year? The UK government What future relationship does the UK want with Europe and will the EU accept that vision? Businesses Do firms have enough certainly to start investing in the UK again and is a post- Brexit transition deal a game changer for businesses?

3 Brexit: Did economists get it wrong? GDP consensus forecasts (YoY%) UK Eurozone

4 Why did we get it wrong? (000s) Unemployment and job vacancies both rising Unemployed claimant count Job vacancies 1. Article 50 was triggered 9M after the vote 2. The UK s momentum was probably stronger than thought jobs market 3. BoE stimulus and sterling s plunge supported growth 4. Global economy finally experiencing synchronised growth 5. Tourists, attracted by weak pound, are spending 6. A good Olympics & better weather lift national mood 7. A smooth political transition

5 A broad range of performance Level of real GDP 1Q08 = USA Germany UK NL France Spain Italy Greece 5

6 How does UK growth compare? ING 2018 Growth Forecasts 1.5% 2.2% 3.0% UK 1Q GDP was just 0.1%QoQ vs: 0.4% for Eurozone 0.6% for US 1.4% in China 0.7% in Spain 0.6% in Norway 0.4% in Belgium 0.3% in Italy 0.3% in Germany 0.3% in France 6

7 The perfect storm for UK retail raises questions over rate hikes 1 Real incomes are barely rising Squeeze is past the worst, but consumers remain very cautious as food/fuel costs partly offset better wage growth 2 Minimum wage costs are rising Increases in the National Living Wage have seen retail margins come under pressure Business rates have picked up significantly A revaluation of commercial property values last April have meant many retailers are facing much higher business rates (taxes) 2 1 INGF Consumer credit growth has slowed sharply Lower credit availability means consumer have fewer options to finance spending Real wage growth (YoY% rhs) Real wage growth = Wage growth inflation *Both series are smoothed using 3M moving averages Source: Macrobond, ING Jan 13 Consumer credit supplied ( bn) Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Source: Macrobond, ING Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 7

8 Housing market in trouble? 100 Housing slowdown points to lower prices (% balance) (YoY%) 30 Economic uncertainty and squeezed real incomes have seen demand for housing slow Tax changes for Buy-to-let have compounded the situation London hit hardest RICS rice balance at -65%. Northern Ireland & Scotland the strongest regions still seeing decent price rises Average sales per surveyor is lowest for 6 years Estate agents in London are selling 2 properties a month versus long run average of RICS new buyer enquiries (lhs) RICS house price balance (lhs) Nationwide house prices (rhs)

9 Few signs of inflation once currency stripped out 6.0 Contribution to annual change in CPI (%) Items with less than 25% import intensity Items with more than 25% import intensity Energy CPI (YoY%) Source: ONS, ING 9

10 Will the Bank of England hike at all? The weak growth story is unlikely to go away any time soon. But policymakers have long been focussing more heavily on better wage growth and global activity. We think the Bank still has a preference to hike this year. August looks like the best bet, because after then, efforts to raise rates could be complicated by Brexit noise. Rate hike checklist Faster wage growth UK OIS implied probability of an August rate hike (%) [VALUE]% [VALUE]% Based on Bloomberg WIRP (interpolated OIS) 0 Aug 17Sep 17Oct 17Nov 17Dec 17Jan 18Feb 18Mar 18Apr 18 Stronger global growth Brexit transition period Rebalance growth towards investment/ exports Recovery in consumer activity 10

11 What is the UK asking for on Brexit? Managed Divergence: How the Three Baskets approach would work Full alignment In the first basket, effectively nothing changes: The UK abides by EU rules but the UK would retain the right to diverge in these areas in future. Possible examples include aviation, manufacturing (to ensure frictionless supply chains) and medicine 1 Divergence The final basket would involve different regulations and different goals. This would be where the UK would go it s own way completely in cases where it perceived EU rules to be burdensome. Possible examples could include certain services and some forms of manufacturing (e.g. Hoovers) 3 2 Mutual recognition Here, both sides would mutually recognize one another s rulebooks, enforced by a dispute resolution mechanism to maintain a level playing field. This would allow UK regulation to differ to the EU s, whilst achieving the same goals. Possible examples include environmental standards and financial services 11

12 12 EU position no cherry picking

13 Canada deal not good enough for the UK Value of UK exports of goods & services bn bn UK exports by type Goods non-eu EU Services Services only make up 30% of UK exports to the EU, but 63% to non-eu Goods exports to the EU are just 25% of UK exports ( 145bn) versus 45% ( 100bn) 20 years ago. UK imports 318bn from the EU 13

14 The impact on infrastructure Lorry traffic at selected UK ports Number of lorries, 2015 Forth 414 Tees and Hartlepool 4,369 Supply chains need time to adjust Complex modern supply chains mean goods often travel multiple times between the UK and EU before being sold in the single market (e.g. BMW Mini) These processes will take time (and money) to re-orchestrate. Belfast 153,730 Liverpool 125,729 Hull 66,264 Grimsby and Immingham 87,287 There are logistical considerations too At Dover, less than 1% of lorries arriving/departing currently require checks 1. Holyhead 286,003 Felixstowe 8,311 The British Freight Transport Association has said that adding even two minutes to the customs process could generate queues of up to Harwich 17-mile queues on the M20 motorway. Milford Haven 33,307 London 12, ,163 Dover 2,564,994 Avoiding this will require new staff, but this too takes time. For instance, it takes 3 years to train a new customs official in Germany, and 2 years in France. Channel Tunnel 1,641,638 Source: Institute for Government, Department for Transport 1 Implementing Brexit: Customs (Institute for Government report) 14

15 Is a 21 month transition really long enough? Both sides want to keep the transition time-limited Brexiteers want it over by next election in don t want the decision reversed by a troublesome electorate but businesses and the government will have their work cut out December 2020 coincides with end of current EU budget period UK would have to pay to extend transition Customs staff need be to hired and trained e.g currently Northern Ireland only has 57 Border Force officers IT infrastructure to cope with customs pre-approval New customs infrastructure needed inspection posts at air and ferry ports New road and parking for lorries at ports is there any room at Dover? 15

16 Some betting odds No Brexit deal by April 2019 = 7/4 Another referendum before April 2019 = 4/1 UK re-applies to join EU by 2027 = 3/1 Next general Election: 2018 = 3/ = 9/ = 8/ = 6/ = 11/8 Next prime Minister: Age Remai n Leave May Survation poll 65 Jacob Rees Mogg = 4/1 Jeremy Corbyn = 11/2 Boris Johnson = 8/1 Michael Gove = 9/1 Gavin Williamson = 10/1 Amber Rudd = 11/1 16

17 Reasons for optimism: Demographic incentives 455 Population projection: EU excluding UK (millions) Age-dependency ratio (No. of citizens aged 65 or above per 100 working aged citizens) 440 Germany 33% UK 25% population size 2060 population projections 430 UK 65m UK 80m Germany 81m Germany 71m Source: European Commission 17

18 USD: Making everyone (else) great again! When caution s not enough for the euro What we really think of the Bank of England s rate decision Some Brexit clarity at last? Riding the cryptocoaster Normalisation will be a long, uncomfortable journey G10 FX: Careless Central Bank Whispers Trade war: What is it good for? Trump: The next 100 days Get all our latest thoughts and ideas on our new website from economic and financial analysis 18

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