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BCC: UK businesses hitting the brakes hard on ongoing Brexit impasse

According to the British Chambers of Commerce's quarterly economic survey, found that key indicators of UK economic health weakened considerably in Q1. In particular balance of services companies reporting rise in exports sales dropped to lowest in a decade. Balance of firms reporting improved cashflow turned negative for the first time since 2012. Also, investment intentions in manufacturing and services were at lowest in eight years.

BCC Director General Adam Marshall said "our findings should serve as a clear warning that the ongoing impasse at Westminster is contributing to a sharp slowdown in the real economy across the UK. Business is hitting the brakes – hard." Also, "the prospect of a messy and disorderly exit from the EU is weighing heavily on the UK economy, and must still be avoided"

Marshall also complained that "for too long Brexit tunnel-vision has distracted government from fixing the fundamentals to support growth here in the UK."

Full BCC release here.

BoC: Poloz Keeps His Cards Close

Bank of Canada Governor Stephen Poloz spoke this afternoon in Iqaluit, NU. His remarks focused on international trade developments.

As is often the case in these speeches, we were given a historic overview of trade developments. Early offshoring has now given way to reshoring in Poloz's view, as the cost of labour has become less of a deciding factor in locating global production. The result has been a reduction in the 'intensity' of global trade and slowing trade growth globally.

At the same time, Service exports have been rising in line with the service sector more generally. The Governor noted that Canada now sells about $120 billion per year in services to the rest of the world (about 17% of total exports), and they have been outpacing growth in goods exports. This category includes professional services, financial services, tourism, and others.

Staying with the services theme, Governor Poloz suggests that the rise of services more generally can help explain the disconnect between soft economic growth of late and still robust labour markets, noting that it can be difficult for statisticians to fully account for the impact of services in the GDP numbers.

Conversely, the Governor also reflected on the ongoing adjustments in the oil sector, and the ongoing risk of a global trade war. He noted that the developments to date have had a scarring effect on the Canadian economy.

Ultimately, the Bank still believes that things will work out, pointing to healthy domestic fundamentals and new trade agreements. Despite a global economy "performing less well than we believed only a few months ago", and housing sector taking "longer than previously expected to digest" changes to mortgage guidelines and higher rates, the Bank continues to see both the need for the current stimulative (in their view) policy rate, and that the run of below-potential growth will be temporary.

Key Implications

This was an interesting speech, covering a lot of ground on how trade, and economies more generally, have been evolving since the global financial crisis. But, for those of us looking for hints as to their next move, it was slim pickings.

The rate-specific communication hewed closely to recent messaging. Recent headwinds are seen as temporary, if somewhat more prolonged than the Bank of Canada had previously thought. Gone were any references to future rate increases, but the current policy rate is still seen as below the 'neutral range'. It seems we will have to wait until the next Monetary Policy Report on April 24th to see what change, if any, the Bank will have in its assessment of this range.

The press conference was a bit more exciting. Asked about the inversion of the Canadian yield curve (the yield on 10 year government debt stood at 1.70%, below the 1.75% overnight rate at time of writing), Poloz referred to it as an 'innocent inversion', emphasizing that he does not see a recession coming, that it is less useful as a signal in Canada, and that other indicators are not corroborating the story.

Market moves appeared to reflect the dearth of new information. Market implied odds of a rate cut fell a bit, but still price a greater than one in five chance of cut by September, and the loonie was little changed in the wake of the speech.

We agree that the current soft patch is likely to be temporary, but, while Governor Poloz was silent on changes to the outlook (their current 1.7% growth forecast for 2019 appears optimistic, even in light of January's strong GDP figures), we don't expect to see much above-trend growth any time soon. With growth set to shift back only to trend, there will likely be little in the way of inflationary pressures, and so little scope for a higher monetary policy interest rate. We may already be home.

UK parliament rejected all four Brexit alternatives again, but customs union option was close

Sterling weakened mildly as the UK House of Commons, unsurprisingly, rejected all four Brexit alternatives in yesterday's indicative votes again. The closest one to get a majority was Conservative MP Kenneth Clarke's Customs Union option, which was defeated 276-273. The most voted one was Labour Peter Kyle's Confirmatory Public Vote, which was defeated 292-280.

Brexit Minister Steven Barclay complain in the Parliament after the votes that "this House has continuously rejected leaving without a deal just as it has rejected not leaving at all." And he reiterated that " the only option is to find a way through which allows the U.K. to leave with a deal." He also noted "if the house were to agree a deal this week, it would still be possible to avoid holding European parliamentary elections." It's taken as a hint that Prime Minister Theresa May could put the thrice-defeated Brexit deal to a fourth vote this week.

RBA kept cash rate at 1.50%, no dovish shift in statement

RBA left cash rate unchanged at 1.50% as widely expected. There is no dovish shift in the statement yet. The central bank continues to sound non-committal and noted "the Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time."

There are little changes in substances in the statement too. RBA noted that GDP data paint a "softer picture" of the economy than job data. It acknowledged the mere 0.2% growth in Q4 and 2.3% over 2018. It also noted that "growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets."

Employment and inflation outlook are unchanged. RBA expects "continued improvement in the labour market is expected to see some further lift in wages growth over time", gradually. Inflation is expected to pick up gradually over the next couple of years. The central scenario is unchanged for inflation to hit 2% in 2019 and 2.25% in 2020.

Here is the full statement:

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to ease financing conditions, partly in response to slower growth in the economy. Globally, headline inflation rates have moved lower following the earlier decline in oil prices, although core inflation has picked up in a number of economies. In most advanced economies, unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative and have eased recently. Long-term bond yields have declined further, consistent with the subdued outlook for inflation and lower expectations for future policy rates in a number of advanced economies. Across a range of markets, risk premiums remain low. Equity markets have also risen and are being supported by growth in corporate earnings. In Australia, long-term bond yields have fallen to historically low levels and short-term bank funding costs have moderated further. The Australian dollar has remained within its narrow range of recent times. While the terms of trade have increased over the past couple of years, they are expected to decline over time.

The Australian labour market remains strong. There has been a significant increase in employment and the unemployment rate is at 4.9 per cent. The vacancy rate remains high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. Continued improvement in the labour market is expected to see some further lift in wages growth over time, although this is still expected to be a gradual process.

The GDP data paint a softer picture of the economy than do the labour market data. GDP rose by just 0.2 per cent in the December quarter to be 2.3 per cent higher over 2018. Growth in household consumption is being affected by the protracted period of weakness in real household disposable income and the adjustment in housing markets. The drought in parts of the country has also affected farm output. Offsetting these factors, higher levels of spending on public infrastructure and an upswing in private investment are supporting the growth outlook, as is the steady growth in employment.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened a little further over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

Inflation remains low and stable. Underlying inflation is expected to pick up gradually over the next couple of years, although this has been taking a little longer than earlier expected. The central scenario is for underlying inflation to be 2 per cent this year and 2¼ per cent in 2020. In the near term, headline inflation is expected to decline because of lower petrol prices earlier in the year, while underlying inflation is expected to remain broadly stable.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.

(RBA) Statement by Philip Lowe, Governor: Monetary Policy Decision