Director’s Weekly News – 18th June 2018

Barclays Economic Update: Industrial production contracted a sharp 0.8% (m⁄m) in apr’18; with the exception of the impact of the forties pipeline closure, this is the weakest reading in a year. Manufacturing production was the main drag, contributing -1pp to the fall in ip; at -1.4% (m⁄m) and -0.5% (3m⁄3m), this is the sharpest decline seen since 2012. The ONS highlights that the fall in manufacturing was driven by slower growth in both export and domestic turnover. As we had expected, energy consumption declined due to the warmer than expected weather in apr’18, contributing -0.1pp. Weakness was broad based across industrial sectors, with only mining and quarrying providing a positive contribution, of 0.8pp. There was broad weakness across the main industrial groups, with investment goods contracting the most at -2.5% (m⁄m), dragging the 3m⁄3m growth from 2.3% in mar’18 to 1.1% in apr’18. The carryover from production to q2’18 gdp now stands at -0.8pp.

The trade balance deteriorated sharply in apr’18 as export volume collapsed by 6.1% (m⁄m) (-2.9% (3m⁄3m) and -9.6% (y⁄y)) reversing most of the momentum build up in the course of the past two years as exports fell back to their lowest level since oct’16. With imports growing 0.5% (m⁄m), the trade balance fell from -£3.2bn in mar’18 to -£5.3bn (-£30.8bn over 12 months), also its lowest level since oct’16. The breakdown shows still growing albeit sharply weakening services exports (+2% (y⁄y) in value, the weakest level since jan’16), while goods exports collapsed (-7.5$ (y⁄y) in value, the weakest level since oct’15), driven by core goods (i.e. non oil and erratic). In terms of regional breakdown, it seems that apr’18 weakness in trade mostly originated from outside the EU and the US in particular, with US data showing imports of automobiles and consumer goods sharply lower. The UK trade balance with the US recorded its first negative print and weakest print since the end of 2002. However, aggregate US data does not show similar volatility, suggesting that the UK is paying the price of an unfavourable sector exposure or regional rotation in trade. The data release points to a renewed negative contribution of trade to q2’18 gdp. GDP output trackers point to a weak rebound in q2’18 with this initial data signalling growth in the region of just 0.3% (q⁄q).

Summary: A weak start to the q2’18 activity data as IP and manufacturing contracted sharply in apr’18, with weakness seen across most sectors. The weakness in IP is in line with weakness across Europe. The deterioration in the trade balance and in particular trade with the US stands out, as we see the weakest trade balance with the US since 2002. q2’18 gdp trackers so far point to 0.3%% (q⁄q).

Barclays Brexit Update: According to our latest survey, investors seem sceptical that UK and EU negotiators will reach an agreement over the Irish border issue in a timely manner. The majority expect that there will be no agreement in time for the EU summit on 28-29 jun’18, and consequently that corporates will continue to implement contingency plans without delay. Consequently, investors have reassessed the near-term outlook for growth and question whether the weakness in q1’18 was merely weather related or in fact partly a result of corporate contingency plans, thus throwing into question whether the weakness is transitory or actually more persistent. This, in turn, has led to investors pushing out further the expected timing of the next rate hike. Concerns over brexit negotiation risks have risen again following the increased focus on the Irish border and the firm stance taken by the European Commission. Meanwhile, recent media focus on internal divisions over the border issue, as well as the EC’s scepticism towards the UK government’s recent proposals over the border solution, had little impact on investors’ political outlook. Investors see PM May continuing to lead the UK through negotiations as the proportion of those expecting her to remain PM until Mar’19 remains stable. Investors continue to see a low probability of a recession over the next 12 months. However, expectations for the timing of the next hike continue to be pushed out. An increasing proportion of investors now believe that the MPC will wait until 2019 before hiking. In the agreement made in phase 1 back in dec’17, the backstop agreement applied only to Northern Ireland in the event there was no other solution agreed. In this scenario, Northern Ireland would remain under full regulatory alignment with the EU and full EU supervision and enforcement mechanisms. This week, PM May proposed that the backstop should apply to all of the UK. In order to appease internal disagreements within the Conservative party, a compromise paper was then published, which proposed a “temporary customs arrangement”, with the backstop “expected” to end in dec’21.

EC chief negotiator Barnier voiced scepticism over the proposal and stated that it would be examined within the context of three questions: 1) is it a workable solution to avoid a hard border; 2) does it respect the integrity of the single market and customs union; 3) is it an allweather backstop? Consequently, he stated that the backstop could not apply to the whole of the UK as it breaches the requirement for regulatory alignment, and that the temporary nature of the backstop was not accepted as countries were required to adapt only once, not several times. Barnier also stated that the separation agreement would need to be finalised by the autumn. These developments further reduce the possibility for progress at the jun’18 EU summit, in our view. Progress on this issue has been further slowed given the House of Commons vote on the EU withdrawal bill this week. The bill will return to the House of Lords following the addition of compromise amendments. Investors had not been overly concerned by the impact of the vote.

In our May’18 survey, the majority of investors believed the government would win the vote and placed the probability of MPCs voting against the government at less than 50.0%. The main concern had always been that of delays to negotiations. Delays are expected to impact corporate decisions. Given the developments outlined, it is no surprise that investors remain cautious with regards to the outlook for clarity over the coming months. Almost 40.0% of investors expect that corporates will continue to implement contingency plans without delay, 15.0% more than when we last posed the question in apr’18. fewer investors (26.0%) expect such plans should be delayed by one year or more. The technical agreement over the transition period was announced ahead of the mar’18 EU summit and had originally provided some relief for investor sentiment. However, the EU has clearly stated that nothing has been agreed until everything is agreed. Furthermore, the overall deal needs to be ratified by the UK parliament, the EU parliament and EU Council (member states). Delaying an agreement over the border issue leaves less time for the ratification process.

Sainsbury’s/Asda: FoB received an email from the advising that early this week the Competition and Markets Authority will publish its summary of the responses it received to the preliminary ‘invitation to comment’ on the proposed Sainsbury’s/ASDA merger.

Childhood Obesity Plan 2: It is expected that the government will publish a Childhood Obesity Plan 2 in the near future.

GCA 2018 Annual Conference Invitation: The Groceries Code Adjudicator (GCA) will be holding their free annual conference on Monday 25 June at Church House in Westminster, London. Attendees will hear from the Minister for Small Business, Consumers & Corporate Responsibility Andrew Griffiths MP, and the Groceries Code Adjudicator Christine Tacon on the GCA’s annual survey results. Christine will also present her plans for the coming year and hold 1-2-1 meetings with suppliers. If you’d like to join the conference, please complete the registration form here before 17:00 on Wednesday 20 June.

Product Journey Case Studies Needed: FDF is looking for simple overviews of product journeys that sets out the origin and various points of processing and movement of the constituent ingredients and raw materials and where they are used in the process to help us visually bring to life the complexity involved in the manufacturing process. We’re looking to replicate this example of a mini cooper in the Guardian for our industry, so that we can illustrate the journey it goes through with the ports or borders it crosses. We appreciate there are obvious sensitivities involved in this for members, so we’re happy to label it as ‘a bar of chocolate’ for example rather than use a brand name if preferable. Please send your product journey case studies to Luke.