UK, US, and Chinese Economy in Focus 

The UK economy showed signs of picking up over January as the UK’s services sector – which accounts for roughly 72% of the UK economy – saw an uptick in growth. Overall, UK GDP grew 0.2% on a monthly basis for January, meeting market expectations. This followed December’s contractionary print, where the UK economy shrank 0.1% over the month.

Growth in the services sector was contrasted with production output which fell by 0.2% in January, following growth of 0.6% in December. This came as construction output rose by 1.1%, after a fall in December of half a percent.

Commenting on Cross Industry Themes from the Monthly Business Survey, the ONS noted that “some industries saw supply chains impacted by disruption in the Red Sea” while “industrial action was again cited as a reason this month, which may have negatively impacted output”.

This morning’s GDP print of course follows the UK entering a technical recession during H2 2023. The IMF forecasts UK GDP to grow by 0.6% in 2024 (in line with its October 2023 forecast), which would represent the second lowest growth in the G7 after Germany at 0.5%. While the OECD are expecting slightly higher growth of 0.7% this year, it can be contrasted against US growth which they expect will rise 2.1% over the course of the year.

The New York Times run an interesting story this morning about rising concerns in the West over China’s rise in exports.

China has long been the manufacturer of consumer goods to the world, but the pace of growth now means their surplus in manufactured goods is around twice what Japan’s was in the 1980s and they produce about as much as the US, Germany, Japan and South Korea combined!

The problem that the West has is not necessarily with the volume of goods, but the fact that China continues to find ways of subsidising these goods, which they see as unfair advantage. Even with trade tariffs in place, China is often able to trade with other manufacturing hubs like Vietnam and subsidise the components they are buying from China, so the product is ‘Made in Vietnam’ and therefore not subjected to the same trade terms.

Though “rules of origin” can be tightened, there are plenty of countries that don’t care that China is subsidising industry and are more than happy to be able to consume effectively discounted goods. For example, it’s of little concern in Brazil that they’re buying a Chinese product cheaper than a US equivalent.

The concerns are two fold – one that China is putting local manufacturers out of business, but also that China is very happy to continue to do business with Iran, Russia and North Korea, which understandably doesn’t sit well.

It’s not really clear what can be done about these practices though and, as much as it’s a problem for the US and Europe, so is inflation, so cheaper goods may come at the cost of domestic productivity but it will help lower prices, whilst increase bilateral trade would mean potentially opening up China’s billion or so consumers to the West *see Apple and Tesla.

One practice that has been suggested by economists is that China could subsidise their own population, rather than manufacturers and spur domestic demand, which would boost their economy whilst rolling back subsidies, to the same net economic benefit.

The link to the article is here: China’s Exports Surge Are Drawing a Global Backlash – The New York Times (nytimes.com)

Yesterday, fresh data from across the Atlantic showed US inflation ticking up 10bps over February, hitting 3.2% on an annual basis. This beat market expectations – which was pointing to a 3.1% print, unchanged from January’s print – and demonstrated that the Fed continue to face headwinds in their fight to bring inflation back down to their 2% target rate.

Following the release of the CPI figures, markets downwardly revised rate cut expectations indicating that the Fed will likely hold higher for longer. For example, while markets on Monday were pricing in the around 91bps worth of cuts by the end of the year, this has now been downwardly revised to 85bps yesterday.

The beat on US inflation figures comes as markets await the Fed’s hotly anticipated Dot Plot next Wednesday which will see policy makers make forecasts on the central bank’s monetary pathway. This will form part of the FOMC March meeting which will include the Fed’s interest rate decision and the press conference half an hour later.