Economic Update: 28 July 2017

IMF GROWTH PROJECTIONS

This week the International Monetary fund (IMF) laid out its forecast for future GDP growth. Like most institutions forecasting economic growth their record is patchy, but the self-assured nature with which the numbers are delivered is undiminished. John Maynard Keynes famously looked forward to the day ‘when economists could manage to get themselves thought of as humble, competent people, on a level with dentists’.

It is worth recalling that the IMF cut its forecast in the wake of Brexit to 1.1%, raised it to 2% in April and have now reduced it to 1.7%. However, despite the recent downgrade the UK economy is still expected to grow at a faster rate than France and Italy and only 0.1% slower than Germany; whereas recent news would have you believe the UK economy was in a real mess.

The IMF also downgraded its growth prediction for the US which it now thinks will grow at 2.1% for 2017. However, the prediction of 2.3% that it gave in April for the US was dependent on Donald Trump implementing his fiscal stimulus plan.

10-Year Average GDP Growth and IMF GDP Growth Forecasts

Source: Bloomberg, 27 July 2017

The IMF increased its forecast for GDP growth across the global economy to 3.5% in 2017 and 3.6% in 2018, an increase from the predictions made last year of 3.2% for both 2017 and 2018. The organisation also expects global trade to grow, predicting a 4% growth rate in 2017 and 3.5% in 2018.

Overall, if the IMF is roughly on the right track, the report is a positive indicator of future prospects for the global economy, and trade in particular. Furthermore, any slowdown in the US and UK appears to be less of an issue as other developed economic regions such as the Eurozone and developing economies are seeing an uptick.

US HOUSING INDUSTRY

The number of building permits for new privately owned housing is considered an important leading indicator for the US economy. The change in the number of building permits gives an indication about the health of the construction industry. In June, the number of permits increased by 7.4% to an annualised rate of 1.25 million from 1.17 million in May, which was above the consensus estimate of 5.1%.

The economy is still recovering from the last US housing crisis, which began late 2007. The sudden fall in housing permits signalled the end of an economic expansion cycle and led to a subprime mortgage crisis that triggered a global financial crisis.

Since 2011 we can see from the chart the primary trend in the US housing market has been upward sloping. Yes, there were a few transitory blips along the way but in keeping with a normal pattern of structural growth.

New Privately Owned Housing – US Building Permits

Source: www.census.gov, July 2017

In terms of the way the permit process works, they are usually applied for a few months prior to construction and once granted, the process for a residential project could take 12-18 months to complete. There is a risk of cancellation which would eliminate expected activity but if followed through it points to stronger economic activity further down the line.

Housing is a pillar supporting the US economy. It creates new income and jobs, purchases of goods and services, and revenue for local governments. National Association of Home Builders research shows that building 100 single-family homes typical creates 297 full-time jobs and $11.1 million in federal, state and local tax revenue.

New Privately Owned Housing (US)

Source: www.census.gov, July 2017

FEDERAL OPEN MARKET COMMITTEE

The Federal Open Market Committee (FOMC) met on Wednesday, the fourth time this year. With two interest rates hikes implemented this year already, analysts strongly believed that the committee would not raise rates in this meeting, giving 0% probability of a hike the day before. Economists and analyst’s attention was centred on inflation and the Federal Reserve’s (the Fed) balance sheet.

According to a Bloomberg survey of 41 economists, the timing of the Fed’s balance sheet reduction is expected to be revealed in September (the next meeting), with one further rate hike to take place in December if inflation is accommodating.

As expected, the FOMC kept its interest rates unchanged and iterated that balance sheet reinvesting will continue ‘for the time being’, but the unwinding process will begin ‘relatively soon’. In the statement, inflation is still running below the 2% target but all said and done the Fed seem determined to begin to move the economy off central bank life support. Ultimately this is a good thing but it may also mean the patient may have relapses from time to time.  As this process unfolds it is important to get a sense of perspective on the challenges that lie ahead and we will do our best to keep you informed with balanced, informed views and interpretation of the data picture.

US Consumer Price Index (YoY% Growth)

Source : Bureau of Labor Statistics, 30 June 2017

With analysts so far having been accurate with their estimates, we now must wait for September’s meeting to see if FOMC will decide when to start the normalisation process. Nevertheless, investors are now wondering how much inflation has to rise to justify a third rate rise this year.

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