The economy remains resilient, albeit with a modest underlying growth rate

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the GDP data for 2019Q1:

  • GDP rose by 0.5% (QOQ) in 2019Q1, but this figure was probably distorted upwards by preparatory stock-building ahead of what was to have been Brexit Day (29 March).
  • In 2019Q1, household consumption, government consumption and investment all contributed to GDP growth, but the trade balance acted as a drag on growth. There was some recovery in business investment.
  • Underlying growth continues, albeit at a relatively modest rate. NIESR expects an increase of 0.3% (QOQ) in 2019Q2.

Concerning other UK data:

  • GDP slipped 0.1% (MOM) in March, but growth should resume in April.
  • The latest Markit surveys suggested some, albeit unspectacular, growth in April.
  • Consumer credit growth eased further in March, whilst the number of new mortgage approvals slipped.
  • The trade balance deteriorated significantly in 2019Q1, as the deficit on goods and services widened by £8.9bn to £18.3bn (3.4% of nominal GDP). But the ONS said that much of the worsening reflected a surge in unspecified goods imports (including non-monetary gold). Allowing for this, the trade deficit widened by just £1.9bn to £12.2bn (2.3% of GDP).

Concerning Central Banks:

  • The MPC of the Bank of England left policy unchanged at their May meeting. They remained dovish about interest rates and market expectations are for a 0.25% increase by around 2022Q1 (3 years away).
  • The Bank’s May Inflation Report revised the GDP growth projections higher: to 1.5% for 2019 (1.2% in February), 1.6% for 2020 (1.5%) and 2.1% for 2021 (1.9%).
  • The Fed also left interest rates unchanged at their April/May meeting, striking a dovish tone. Recent US data suggest a robust labour market (the unemployment rate fell to 3.6% in April, the lowest since 1969), whilst GDP rose by 3.2% (annualised) in 2019Q1.

Other economic news:

  • The European Commission revised down its growth expectations marginally for the Eurozone in its May forecasts: to 1.2% for 2019 (1.3% in February, 1.9% in November 2018), and to 1.5% (1.6% in February, 1.7% in November 2018).
  • However, the Commission downgraded Germany more significantly: GDP is now expected to rise by just 0.5% in 2019 (compared with 1.1% in February). The forecasts were unchanged for France, Spain and, incidentally, the UK, whilst Italy’s growth forecast was shaved down after a major downgrade in February. Italy is expected to grow 0.1% in 2019.
  • The US-China “trade wars” continue, with the US raising tariffs on $200bn of imports from China from 10% to 25% in May.

UK political news:

  • The UK will participate in the European Elections (23 May).
  • The Conservative party (especially) and the Labour party lost seats and councils in the recent local elections (2 May), whilst UKIP lost over 80% of its seats. The beneficiaries were the LibDems, the Greens and “others”.

Ruth Lea said, “The GDP estimate for 2019Q1 confirms a remarkably resilient economy, though the quarterly increase was probably boosted by preparatory stock-building ahead of what should have been Brexit Day (29 March). The Bank, moreover, felt the need to upgrade its growth forecasts, despite the trickle of disappointing news in the Eurozone.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

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