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Opinions of Wednesday, 13 July 2016


Meanwhile, in the rest of the world...

It has been easy to forget over the last week, but Britain is a relatively trivial 2.4 per cent of the global economy. But even before the referendum, there were worries about global growth, particularly during the market wobble of January and February.

The outlook has improved since then, but the picture is still mixed. American GDP growth, having been been very weak in the first quarter, looks set for a solid 0.7 per cent gain in the second quarter (an annualised 2.7 per cent on the Atlanta Fed indicator).

Although the latest non-farm payrolls were disappointing, that may be because the employment market is tightening. There are tentative signs of a pick-up in wages; in the last three months, private sector wage growth has been more than three per cent.

Two of my favourite indicators show mixed results. Railroad freight traffic is down 3.9 per cent over the last year in the latest week, although energy played a big part in this (the decline of fracking); trucking volume was up 5.7 per cent year-on-year in May but there were monthly declines in March and April. Overall then, no sign of a recession, but not a boom either.

China's latest purchasing managers' indices for manufacturers (the official measure and the unofficial Caixin indicator) both showed declines with the former at 50 and the latter 48.6. The services PMI was up, however.

The consensus view of a modest, but not catastrophic slowdown seems in order. Japan looks more problematic. More than three years after the election of Shinzo Abe, Abenomics has yet to transform the economy.

The core inflation rate in May was still 0.4 per cent, while industrial production fell 2.3 per cent on the month. The strong yen (boosted by the Brexit vote) will worry the authorities even more.

There was good news in Europe today, with the manufacturing PMI for the euro zone at 52.8, a six-month high and every nation bar France above the key 50 level. But worries about the banking system persist, with a support operation under way for the Italian banking system.

For the G20 as a whole, the OECD reported Q1 GDP growth of 0.7 per cent, with only Brazil suffering a decline. The World Trade Organisation sees world trade growth as 2.8 per cent this year, in line with 2015.

To sum up, the world is chugging along, not speeding. However, this is only with the help of a lot of monetary stimulus from the ECB and the Bank of Japan. More may be on the way from the Bank of England, something that sparked a late rally in the FTSE 100 (and a decline in sterling) yesterday.

All this is driving down bond yields even further; the German 10-year yield is still at minus 0.13 per cent, the US 10-year yield is close to a record low at 1.38 per cent, and the UK yield is at a historic low of 0.8 per cent. None of this suggests enormous confidence about the economic outlook.

But back to Britain. After yesterday's political shenanigans, it is time to rephrase Dean Acheson: "Britain has lost an empire, and has finally found a role—as global laughing stock." In market terms, the fall in sterling and the expected rate cut have allowed the FTSE 100 (a multinational index) to rebound above its pre-referendum level. Today's PMI showed a rebound to 52.1, although the replies came before the vote. In his speech yesterday, Mark Carney said that.

Even before June 23, we observed the growing influence of uncertainty on major economic decisions. Commercial real estate transactions had been cut in half since their peak last year. Residential real estate activity had slowed sharply. Car purchases had gone into reverse. And business investment had fallen for the past two quarters measured.

Given otherwise accommodative financial conditions and a solid domestic outlook, it appeared likely that uncertainty related to the referendum played an important role in this deceleration.

It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected. Moreover, its effects will be reinforced by tighter financial conditions and possible negative spill-overs to growth in the UK’s major trading partners

Statistical (rather than anecdotal) evidence of a slowdown will take time to emerge. Uncertainty over what kind of a deal will be done with the EU may be prolonged; Theresa May, the most likely prime minister, says Article 50 shouldn't be triggered before the end of the year.

The outlines of a deal can just about be seen; all the candidates are adamant for ending free movement of labour. That means no membership of the EEA (like Norway) and restricted access for the financial services sector.

Voters might cheer but finance is one of Britain's successful export areas; with a big current account deficit, it's an odd time for Britain to handicap a key sector (Lord Hill, the British EU commissioner, in charge of this area has already resigned).

For the rest of the world, though, it's a wash if Britain loses market share (and tax revenues) to other countries. Quite rapidly, Brexit will fade as a global factor and become a purely European issue.