Economic News

CBI Latest Economic Update – October 2018:

• CBI surveys suggest that warmer weather has boosted growth over Q3, however these effects are likely to be temporary and are expected to unwind towards the end of the 2018
• The underlying UK growth picture remains subdued, with conditions for consumer-facing firms remaining particularly challenging due to the ongoing squeeze on household incomes. In contrast, the strength in the global economy is expected to continue supporting manufacturing export growth
• CPI inflation edged higher in August, contrasting with consensus expectations of a slight fall.
• The UK economy grew by 0.4% in Q2 2018, according to the ONS’ second estimate of GDP. This was unrevised from the first estimate released last month.

Barclays inflation forecast update:

UK inflation forecasts have been updated following the sept’18 release. Overall, significant changes have not been made to the profile. In the near term, headline and core CPI/H (consumer price inflation including a measure of owner occupiers’ housing costs) forecasts have been lowered taking into account developments in the sept’18. It was felt that the strength in the aug’18 data was likely to prove temporary but had allowed some of the upside surprise to persist given its magnitude. The H2’19 forecast has moved higher as a result of oil futures prices rising and recent firmness in wage data and input cost pressures. For RPI, similar revisions are made and also adjusted the near-term mortgage interest payments forecast to reflect a likely (y⁄y) reported rise in oct’18 mortgage costs.

Underlying UK inflation pressures are seen easing over the coming months. Measures of core or domestically generated inflation such as trimmed, service and non-tradable aggregates show little sign of upward momentum. The effect of past currency depreciation continues to signal deceleration for NEIG over the months ahead. However, wage pressure continues to pick up as core weekly earnings finally exceeds 3.0% (3m⁄y). However, with the CPI forecast moving towards target by year end and oscillating around 2.0% (y⁄y) through 2019, little support is seen for a further rate hike from the BoE.

 

UK labour market Update August 2018 unemployment rate		core average weekly earnings
previous	4%		2.9% 3m⁄y
consensus	4%		2.9% 3m⁄y
actual	4%		3.1% 3m⁄y

 

On a 3m⁄3m basis, employment stood unchanged for the second month in a row while unemployment dropped by nearly 50k, albeit flat month-on-month. As was the case in jul’18, the contraction in the labour force (-50k) allowed for the unemployment rate to remain unchanged. However, the increase in the inactive population (highest in a year) should not be overlooked as labour market dynamics have now clearly changed, with the unemployed now moving into inactive state rather than job seeking. While the participation rate remained unchanged, it is expected to grind slightly lower if current drivers of the job market are sustained.

Meanwhile, average weekly earnings continued to drift higher, driven mostly by a material pick up in the public sector: public sector total pay is growing at its fastest rate in seven years while the equivalent measure in the private sector is at its highest since feb’18. Within the private sector, manufacturing is now slowing, while services (driven by wholesaling, retailing, hotels & restaurants) displays surprisingly strong upside momentum. However, in real terms, earnings, and in particular total pay, display much less momentum, with the annual growth rate barely positive as inflation over the summer surprised to the upside as well.

At the same time, although it will have to acknowledge that a pickup in productivity will keep a lid on unit costs. And national account data show that despite pick up in wages, Unit Labour Costs (ULC) and Unit Wage Costs (UWC) eased in q2’18, removing most of the urge to move rates quickly, as ULC and UWC were up until q1’18 the only measures of domestically generated inflation displaying some upwards momentum.

Summary: Wages continue to accelerate, driven by robust momentum in public sector pay, posting the strongest growth in seven years. However, at the same time, real wages are held up by higher inflation and productivity contains an increase in costs, removing some support for another rate hike. With job creation flat, lower unemployment is driven by a higher inactive segment of the population.

Brexit update

FDF Brexit Update from Ian Wright: We are at the pointy end of Brexit. This week’s interactions for the FDF with very senior representatives of the Department for Exiting the EU demonstrate that very clearly. On Monday Tim Rycroft was in to see the confusingly named but no relation Philip Rycroft, Permanent Secretary (the top civil servant at DEXEU) for a briefing on what was expected from this week’s EU Council. Yesterday the FDF President’s Committee had 30 minutes with Chris Heaton Harris MP, the DEXEU minister responsible for ‘no-deal’ planning. Today I had a 20 minute call with Philip Rycroft, debriefing me on the EU Council and preparations for no-deal.  The level of engagement with Government is unprecedented.

Unfortunately, I can’t say I am a lot clearer on what’s actually going to happen. Although the PM has hinted that she would be prepared to extend the transition period to secure an exit deal, it’s pretty clear she will face huge opposition in selling that proposition to her own party.

A rather more concerning straw in the wind came on Wednesday at the House of Lords where the Secretary of State for Environment, Food and Rural Affairs, Michael Gove MP gave evidence on DEFRA preparations for ‘no deal’. Answering the great Jeff Rooker, Mr Gove told the Committee that a ‘no-deal’ is fast becoming the Government’s lead option, if the UK cannot get a deal. So, although ‘no-deal’ remains only one of several possible outcomes, it’s likelihood has, in my view, increased considerably.

I hear virtually every day from members wanting to know whether or not to devote significant resources, time and management effort to no-deal preparations. My unequivocal answer is now that they should do so. With the time to go before March 2019 running out it’s vital that businesses assess the practical risks they face and look to mitigate them where possible. If you need advice on doing this give us a call – the greatest service FDF can give members in the next few months is to help you stay afloat through this process. We’ll also be holding a one day event full of practical advice in the next few weeks. Please look out for details.

On a more positive note I would encourage all of you to consider joining the trade mission that the UK India Business Council and our commercial partners Santander are offering food and drink companies. It will be taking place next February in Mumbai. A great opportunity for businesses who want to learn about export expansion in the Indian market. There’s more below on how to get involved.

Finally, the FDF is holding the next in series of its’ Breakfast Briefing events next Tuesday, with the former Downing Street Director of Strategy for David Cameron, and co-founder of Populus, the Lord Cooper of Windrush, Andrew Cooper. Get in touch with Kay Relph in the Corporate Affairs team to register your interest.

CBI Brexit Update: The failure to reach an agreement on the Northern Ireland border at yesterday’s Brexit talks has meant that negotiations have stalled – but not collapsed. In the last 48 hours, I’ve been in touch with negotiating teams and Government Ministers and am reassured that both sides are working hard towards a deal and that they understand how damaging failure would be. But the challenge is a significant one.

We fully understand how concerned many firms are and are urging political leaders to prioritise economic outcomes. They need to come back to the negotiating table before December. We will be intensifying our work over the coming weeks, with three main priorities:

1. Working at the top of the UK Government, with EU member states, the Commission and sister federations in BusinessEurope as an honest broker to help negotiators get past the backstop logjam.
2. Ensuring the message is clearly heard that though contingency planning is continuing, many firms will not be ready, and no deal would have serious consequences.
3. Engaging heavily with backbench MPs and Lords to defend the goal of frictionless trade and setting out a realistic checklist for the political declaration.

If the Withdrawal Agreement is achieved before Christmas, the next hurdle will be getting this deal through the UK parliament. To achieve this, a collective effort from businesses – large and small – is required now. Backbench MPs will vote on the deal and therefore hold the key to avoiding a no deal outcome. They must be equipped with evidence from their local businesses on the impact of no deal close to home. Whatever your views on Brexit for your company, I would urge you to make your case known to your local MP at this very crucial stage in our country’s future.

Of course, Brexit is only part of the picture. The fundamental building blocks of the economy are within our control so long as the UK economy is match-fit. Creating a long-term vision for UK competitiveness, ensuring our education system delivers the skills for the future, making place-based industrial strategies work and strengthening the functioning of markets are all vital steps to mitigate Brexit risks and meet the UK’s economic and social needs. Compromises must be made on Brexit to get us out of the starting block on this vital agenda.