An unbalancing act

Confirmation, if one was needed, of a slowdown in the UK economy in the first half of 2017. Faster price rises have slowed consumer spending to a sloth-like pace. It’s rebalancing Jim (of sorts), but not as we wanted. 
Fragile. Q2 GDP growth was confirmed at 0.3%, meaning the economy is now 1.7% larger than it was 12 months ago. Together with Q1’s 0.2%, it’s now clear that growth was pretty weak in the first half of 2017. The main culprit appears to be inflation. Household spending contributed just 0.1% to growth in Q2 as the squeeze on real wages bit hard. The consumer slowdown was largely anticipated but the Bank of England expects growth to be supported by both stronger investment and exports. Yet there’s no evidence of that in these figures. Imports once again grew faster than exports and business investment was totally devoid of growth. Not the sort of backdrop to raise rates against.
How stretched? One of the more worrying statistics lately has been how low the saving ratio has fallen. In Q1 2017, it dropped to an all time low of 1.7%, having been 6.1% a year earlier, sparking concerns that households were spending unsustainably. Yet things may not be as bad as feared. Thanks to rising self employment, the Office for National Statistics has just boosted its estimate of household income by about 3% between 2012 and 2015. Next month, we’ll know the figures for 2016 and 2017 and hopefully they’ll show that households might not have been quite so irresponsible as first feared.
Brain gain. Despite concern that UK services were showing signs of fatigue, June proved a decent enough month for this important sector. Output expanded by 0.4% on the month, above the long run average of 0.3% and it is growing by around 2.5% annually. As has now been the case for a number of years, it’s the higher-end, STEM-related sectors that are performing particularly well, including software design and consultancy, as well as scientific and technical firms. The knowledge economy continues to grow.
Tax and spend.
The state of the public finances is particularly hard to read this year as changes in the timing of EU budget payments make comparisons with previous years more difficult. Nevertheless, by recording a net surplus of £200m in July we did at least manage something that hasn’t been achieved since 2002. The main source of improvement appears to be in the tax take. For the first four months of the fiscal year income and capital gains tax receipts were up 3.3%, whilst VAT receipts were only a whisker behind, up 3.2%. Unfortunately, one month of surplus doesn’t change the overall picture much. The deficit for the first four months of the year is now £22.8bn, £1.9bn more than the same period last year.
In. In 2016, the UK was home to 64.7 million people, ½ million more than in 2015. Around one in seven of us was born abroad, without whom, the UK population would have shrunk by almost 100,000 last year. While Poland provides the largest number of foreign-born residents (911,000) for the UK as a whole, that’s not the case for England, with India taking top spot. London remains the top location. It accounts for 14% of the UK population, but a third non-UK born residents.
Higher things. Inward migration to the UK fell by 50,000 to 588,000 in the year to March. Excluding British expats, the non-UK born population rose by 307,000, of which 127,000 were EU nationals and 174,000 from outside the EU. Almost half (47%) of those arriving do so for work, up from a third in 2011. A quarter study, down from 40% in 2011 and 14% come to join their families. Four-fifths of those studying are in higher education and, with one-in-three from China, education is surely one of the few areas where we run an export surplus with the world’s second largest economy.
Onwards and upwards. The Eurozone economy continued to grow in August according to the “flash”, or preliminary, results from the Purchasing Managers’ Index. France and Germany led the way and the composite index rose by 0.1 to 55.8. Manufacturing saw a modest acceleration in growth while the pace of expansion in services slowed. There was the slightest hint of stronger inflationary pressure but nothing that would give the European Central Bank reason to tighten monetary policy.
Strength to strength.
US growth accelerated to its fastest pace in more than two years in August, according to the flash PMI. The dominant service sector saw a sharp increase in the rate of expansion, the activity gauge rising 2.2 points to 56.9. Firms reported rising jobs and orders. While manufacturing grew it was at a slower rate than in July. With price inflation rising in manufacturing and hitting its highest level in services since 2014, this is the kind of news the Fed wanted to hear as it proceeds with its rate rise programme.
Elusive. Despite the firm recovery, price pressures have remained pretty much elusive across the Eurozone. A situation compounded by the strengthening of the euro in recent months (pushing down import costs). The minutes of the last ECB meeting reveal growing concern around the strong euro. It complicates discussions around tapering the Bank’s bond-buying programme. After all, why rein in stimulus if inflation is forecast to fall short of the central bank’s target?