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Jul 1st 2016, 10:41 by Buttonwood
IT HAS been easy to forget over the last week, but Britain is a relatively
trivial 2.4% 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% gain in the second quarter (an annualised 2.7% 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 3%. Two of my favourite indicators show mixed results. Railroad
freight traffic is down 3.9% 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% 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%, while industrial production fell 2.3% 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%, with only Brazil suffering a decline. The World
Trade Organisation sees world trade growth as 2.8% 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%, the US 10-year yield is close to a record low at 1.38%, and the UK
yield is at a historic low of 0.8%. 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 23rd June, 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.