Low inflation alert

Source: Bloomberg

Economics: every dog has its day

So far this month the flow of good economic news has continued, headed by Q3 GDP ahead of or on target in the US, China and Germany. Emerging from the shadows is Italy with GDP approaching an annual rate of 2% for the first time in six years and a 15th successive positive quarter. Understandably, Italian confidence surveys are perking up despite or because of the revival of Sivio Berlusconi’s political fortunes at the expense of the ruling PD and populist Cinque Stelle (failure to qualify in the World Cup may change all that!). Japan clocked up a seventh successive quarter of GDP growth but the confidence surveys there are still muted if not downright gloomy. Retail Sales were again buoyant in the US in October but this probably reflects replacement of vehicles and household goods damaged in the floods and storms. Following the 19th Communist Party National Congress ,the latest data from China showed almost miraculous consistency with the thoughts of Chairman Xi: new loans down, FX reserves steady and Trade and Industrial Production modestly slowing. The Euro Area as a whole is contuinuing its recovery with annual GDP running well over 2% boosted by both Consumption and Business Investment.  Canada  enjoyed continuing strong GDP growth (3.7% annually) while South Korea’s economy bounced back in Q3, despite all the noise from Messrs Kim and Trump. The one thing that is not happening is inflation’s taking off. The Central Banks may want more of it even if consumers would prefer otherwise but it is unlikely to be driven by commodities (including energy which has a 29% weighting in the Bloomberg Commodity Index). Any significant upward pressure will have to come from wages and exchange rates, which will vary between countries but represents yet another challenge for our own ‘sceptred isle’.

One of the UK’s many challenges and not just for the UK

Source: Bank of England Quarterly Inflation Report November 2017

 Overall, the latest UK economic data has been only slightly better than mixed. On the plus side , Q3 GDP at +0.4% was better than expected with higher Business Investment, the Labour Market remains strong, the Manufacturing Sector is going well while Services hold up and the Public Finances are resilient. Not so good are a drop year on year in October Retail Sales, although to some extent distorted by previous months, a soft Construction Sector and, very ominous in the UK, wobbling house prices. The real worry, however, is the squeeze on living standards with average earning only ticking over at just above 2% and the CPI hovering at 3%. The UK is not alone in this but the chart shows why the Bank of England and Treasury are worried. Real pre-tax income per head (black line) slumped in the 2008 crash and did not properly recover until 2011 (too late to save the Labour Government) and has been falling away since the 2015 election (after surging helpfully for the Tories). The bars indicate the three main factors : pre-tax pay (red) plus new employment (blue) less inflation (grey).  This is a key component of the anger that fuelled the Brexit vote:  subdued earnings, higher inflation, housing shortages and deteriorating public services. It would be a major challenge for any government, let alone one engaged in internecine conflict over Brexit. It is going to be painful to listen to the much-maligned Spreadsheet Phil deliver a Budget that will surely fail to face up to the challenge.

Written by: Alastair Winter