1

No change at the Bank and the ECB, but the Fed is set to raise rates again before too long 22nd May 2017

Introduction: no change by the MPC

As expected, the MPC left monetary policy unchanged at their May meeting. The Committee voted by a majority of 7-1 to maintain Bank Rate at 0.25% and voted unanimously to maintain the stock of corporate bond purchases at £10bn and the stock of government bond purchases at £435bn.1 Kristin Forbes (on the “hawkish” wing) voted for a rate increase (to 0.5%), but she is due to leave the Bank on 30 June. Again as expected, there were few changes to the forecasts for the UK economy in the Bank’s May Inflation Report.2-4 The key points to note are (and see annex table 1 for the forecast summary): • GDP growth for 2017 was shaved down to 1.9% compared with 2.0% in February, but

thereafter the annual growth forecasts were revised modestly higher. • The Governor emphasised that these fairly optimistic growth projections assumed a “smooth”

Brexit, where a smooth Brexit required “an agreement about future trading arrangements and…a transition, or an implementation period, from the negotiation to that new agreement.”5

• The inflation forecast was revised upwards for 2017, but thereafter revised down. The Bank expected CPI inflation to peak a little below 3% in 2017Q4.

• Weaker consumption growth, reflecting the squeeze on real incomes, was expected to be broadly offset by rising net trade and investment in 2017. Whilst wage growth was expected to remain weak, and be outstripped by the rise in inflation in the near-term, the MPC projected that wages would rise significantly as the output gap narrowed (and closed by the end of the forecast period).

Assuming a “smooth” Brexit and continued growth, the MPC expected interest rates would rise to more normal levels over the next three years. More specifically, the MPC Minutes said rate rises could be “somewhat greater…than the very gentle rising path implied by the market yield curve

Ruth Lea Economic Adviser Arbuthnot Banking Group ruthlea@arbuthnot.co.uk 07800 608 674

PERSPECTIVES

By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group

2

underlying May projections”.6 There was also the guarded warning that “…some…members noted, however, that with inflation remaining above the target at the end of the forecast period, and uncertainty about the extent and persistence of the slowdown in Q1, it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted”. But, on the whole, there was little sense of urgency in raising rates, with the MPC prepared to pragmatically “look through” the above-target inflation rates (as they did in 2011, when CPI inflation averaged 4.5%). Chart 1 shows the markets are currently taking the view that rates will be held at 0.25% for some time, and only reach about 0.85% in 5 years. Granted expectations have tightened since August, when further cuts were expected, but they are still extraordinarily, probably unrealistically, low and they have softened since February. Chart 1 UK instantaneous nominal forward curve (overnight index swap rates (OIS), %), months out to 60 months, at selected dates

Source: Bank of England, webpage on yield curves. Value in series identifier, month 60.

The UK economy: some weakness in the first quarter

Since the last Perspective,7 there have been several economic indicators. They confirmed some weakness in 2017Q1 but suggested a potential pick-up in activity in 2017Q2. (See annex table 2 for the updated economic data tracker.) Concerning first quarter developments: • Industrial production increased by just 0.1% (QOQ) in 2017Q1, reflecting the 4.3% (QOQ) fall in

the output of electricity and allied industries, which in turn reflected the relatively mild weather.8 The other three components showed some growth, however. Manufacturing rose by 0.3%, whilst mining and quarrying output (including North Sea oil) rose by 1.8% and water and allied industries were 0.7% higher. The ONS included an estimate of +0.3% (QOQ) for industrial production for the preliminary estimate of GDP of 2017Q1, so 0.1% fell short. But the ONS noted “…the downward impact of these revisions to previously published GDP was

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0.02 percentage points, which does not impact the headline GDP growth rate to one decimal place”.9

• Construction output rose by 0.2% (QOQ) in 2017Q1, in line with the ONS’s estimate included in the preliminary estimate of GDP for 2017Q1.10

• The trade (goods & services) deficit widened to £10.5bn in 2017Q1 compared with £4.8bn in 2016Q4.11 However, the ONS commented “…this (widening) followed a sharp narrowing in 2016Q4, which was predominantly due to an increase in the exports of erratic commodities (non-monetary gold and aircraft)”. On the raw data, exports slipped 0.5% (QOQ), whilst imports rose 3.3%. Excluding the “erratics”, exports rose 3.9% (QOQ), whilst imports increased by 4.2%. The quarterly trade data are erratic (not least of all because of the “erratics”), but on a trend basis the deficit seems to be “fairly flat”.

• The labour market was very resilient in the first quarter. Employment increased by 122,000 (QOQ) in the three months to March (QOQ), to be 381,000 higher than a year earlier, whilst unemployment fell 53,000 (QOQ) to be 152,000 down (YOY).12 The unemployment rate fell to 4.6%, compared with 5.1% a year earlier. The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.8%, the highest since comparable records began in 1971 and the inactivity rate (the proportion of people aged 16-64 who were economically inactive) fell to 21.5%, the joint lowest since comparable records began in 1971. The unemployment rate of 4.6% was the lowest rate since 1975.

• Earnings growth remained weak, as commented on by the Bank (see above). Average weekly earnings for employees in Great Britain in nominal terms increased by just 2.4% (total pay, including bonuses) and by just 2.1% (regular pay, excluding bonuses) in the three months to March (YOY).13 CPIH inflation was 2.3% in March (2.6% in April, see below), so real earnings growth was effectively flat.

• Reflecting the strong labour market performance (both employment and average hours worked increased in the quarter) and the relatively weak GDP increase (0.3% (QOQ)), output per hour (the ONS’s main measure of labour productivity) fell 0.5% (QOQ) in 2017Q1, after a rise of 0.4% in 2016Q4.14 Productivity growth has been poor since the Great Recession.

• There was some softening in the housing market in March.15-16 The ONS reported that the annual increase in UK house prices was just 4.1% in March, compared with February’s 5.6%. The March weakness continued the general slowdown in the annual inflation rate seen since mid-2016.

Unsurprisingly, there are few official data available so far for 2017Q2, but they do suggest growth may be improving – and CPIH inflation is rising: • Retail sales (volume, GB) were stronger than expected in April, rising by 2.3% (MOM), to be

4.0% higher (YOY).17 However, the monthly data were probably boosted by the timing of Easter (which fell in April this year) and the good weather, so they have to be treated with some caution.

• Job vacancies remained strong in the three months to April. There were 777,000 job vacancies, the highest since comparable records began in 2001.18

• CPIH (CPI, including owner occupiers’ housing costs) rose to 2.6% (YOY) in April, compared with 2.3% in March.19 April’s rate was the highest since June 2013, but still remains fairly modest.20 Higher air fares were the main contributors to April’s increase (offsetting the downward effect in March 2017), reflecting the late timing of Easter.

• Producer output prices inflation was, however, steady at 3.6% (YOY) in April, whilst the inflation rates for producer input prices (materials and fuel bought by UK manufacturers for processing) seem to be moderating.21 The annual increase in input prices in April was 16.6%, down on March’s 17.4% (and 19.9% in January). More specifically, prices of imported materials

4

and fuels rose by 14.9% (YOY) in April compared with March’s 16.9% (and 20.2% in January). April was the third consecutive month the annual rate for imported input costs was lower than for total input costs, reflecting the recent strengthening of sterling. Against the dollar, sterling was trading at €1.30 on 19 May compared with around $1.22-1.23 last October and at the turn of the year. Against the euro, the pound was around €1.16 on 19 May, having weakened this month, compared with around €1.10-1.12 in October 2016.

In addition to these official data, the Bank’s latest “Agents’ Summary of Business Conditions” shed some light on the economy’s developments.22 The Agents concluded that “…consumer spending growth had moderated in real terms, reflecting higher prices. But manufacturing export growth had risen, reflecting the effects of the earlier decline in sterling. And investment intentions had also edged higher and were consistent with a modest growth in spending over the year ahead”. They added “…in the labour market, recruitment conditions had tightened a little further, with skills shortages reported in a wider range of activities…but pay awards remained clustered around 2%–2½% across the economy”. Finally, the CBI’s latest Industrial Trends Survey was, on the whole, positive. The CBI concluded “…manufacturing order books improved [in May] on April, and output growth accelerated in the three months to May.”23 In addition, export orders “stayed robust”, whilst “pricing pressures remain strong.”

The ECB: no policy changes either

Turning to the European Central Bank, there are no signs that it wishes to tighten monetary policy in the near future, despite Eurostat data showing that the Eurozone economy is growing steadily (though note the GDP figure for 2017Q1 was released after the ECB meeting) and deflation has been averted (see below). At the most recent ECB monetary policy meeting (27 April), the Governing Council agreed that interest rates (as announced in March 2016) would be unchanged. They are currently 0.0% (for main refinancing operations), 0.25% (for the marginal lending facility) and -0.4% (for the deposit facility).24 Moreover, the ECB commented “…the Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases”.25 And they added “…regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the new monthly pace of €60bn, are intended to run until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. …if the outlook becomes less favourable… the Governing Council stands ready to increase the programme in terms of size and/or duration.” By any standards, the ECB’s monetary policy remains extremely accommodative. According to Eurostat GDP in the euro area rose by a solid 0.5% (QOQ) in 2017Q1, following a 0.5% increase in 2016Q4.26 There remain, of course, major disparities in performance within the Eurozone, with Spain continuing to grow buoyantly (0.8% in 2017Q1) and Germany recording a firm quarterly increase of 0.6% (though there are suspicions of residual seasonality in the data; the YOY growth rate slipped to 1.7% in 2017Q1 compared with 1.8% in 2016Q4). Germany’s first quarter growth was led by higher investment, strong household and public sector spending and higher net exports.27 But France’s growth was a more modest 0.3% (QOQ, after 0.5%) and Italy’s

5

was just 0.2%, the same as in the previous quarter. Meanwhile Greece technically slipped into recession (defined as two consecutive quarters of negative growth). GDP edged down 0.1% in 2017Q1 after a fall of 1.2% in 2016Q4. The euro area’s annual CPI inflation rate picked up to 1.9% in April, compared with 1.5% in March 2017 and -0.2% in April 2016. Some of the increase in inflation reflects higher energy prices, as in the UK. Excluding energy prices, CPI inflation was 1.3% in April (compared with 0.9% in March 2017 and 0.8% in April 2016).28 The ECB’s target is for inflation rates below, but close to, 2% over the medium term.

The Commission’s latest forecasts: “steady growth ahead”

The Commission adopted a remarkably upbeat tone in their latest economic forecasts, with a modest upgrade to its growth projection for the Eurozone in 2017 (from 1.6% to 1.7%), coupled with no change in 2018 (1.8%).29-30 (See annex table 3a.) Key points were (see chart 2 for GDP projections): • Global growth was expected to strengthen to 3.7% this year and 3.9% in 2018 from 3.2% in

2016 (these data exclude the EU28). This strengthening would appear consistent with the OECD’s latest composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend 6-9 months ahead, which suggested “stable growth momentum” in some OECD countries and “gaining growth momentum” in others.31-32

• GDP growth projections remained firm for Germany and buoyant for Spain. But the growth projections for France and, especially, Italy continued to be lacklustre.

• Specifically on Italy, political uncertainty and weaknesses in the banking sector represented downside risks to Italy’s growth prospects.33-35

• Greece’s growth forecast was revised down, but the Commission was still expecting 2.1% in 2017 (2.7% in February) and 2.5% in 2018 (3.1% in February). Given the poor first quarter figure this has to be questioned.

• Inflation in the euro area was forecast to rise from 0.2% in 2016 to 1.6% in 2017 before returning to 1.3% in 2018 as the effect of rising oil prices faded away.

• Unemployment continued its downward trend, but remained high in many countries. In the euro area, it was expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009 but still arguably unacceptably high.

Concerning the UK, the Commission revised up its growth projections again. Last November the Commission forecast 1.0% for 2017 (down from May’s 1.9%) and 1.8% for 2018 (there was no forecast for 2018 in May 2016).36 In February 2017, growth was revised to 1.5% (up) for 2017 and 1.2% (down) for 2018.37 In May 2017, they forecast 1.9% for both 2017 and 2018 (annex table 3a).

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Chart 2 European Commission Spring forecasts: GDP growth (%), selected Eurozone countries & UK

Source: European Commission, “Spring 2017 economic forecast: steady growth ahead”, 11 May 2017. Turning to the public sector finances, the Commission reported that both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio were expected to fall in 2017 and 2018, in both the euro area and the EU. Moreover, “lower interest payments and public sector wage moderation should ensure that deficits continued to decline, albeit at a slower pace than in recent years”. In the euro area, the government deficit to-GDP ratio was forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018 (chart 3a), whilst the debt-to-GDP ratio was forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018 (chart 3b). Even though there was some satisfaction with the overall direction of travel, the Commission also had some concerns: • The projections for France’s budget deficit showed a modest deterioration in the April forecast

(see annex table 3b). The deficit was expected to be 3.0% of GDP for 2017 (2.9% in February) and 3.2% of GDP for 2018 (3.1% in February), reflecting lower than expected tax and social security receipts as well as higher spending on education, security and civil servant salaries.38 France’s new President Emmanuel Macron (elected on 7 May, inaugurated on 14 May) clearly faces a challenge if he is to meet the EU’s target for the deficit of 3% of GDP. (Elections for the French National Assembly are due on 11 and 18 June.)

• Italy is set to remain of concern, with a projected debt ratio of 133.1% of GDP (2017), coupled with relatively weak economic growth.

• The projections for Greece’s debt-GDP ratio worsened compared with February (see annex table 3c), reflecting the generally deteriorating fundamentals. Greece’s indebtedness remains excessive despite some budget surpluses (arguably a drop in the ocean).39 The next crucial financial date for Greece is in July when the country is due to make substantial debt repayments to its creditors. In order to make the payments, Greece will need more funds from its current (third) assistance programme. The Greek parliament recently (18 May) approved a new package of austerity measures, in order to (hopefully) qualify for the next instalment of the bailout funds (€7.5bn) as well as some debt relief.40 The austerity package covered tax rises and further cuts to pensions.

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Chart 3a Commission Spring forecasts: budget balance as % of GDP, selected Eurozone countries & UK

Chart 3b Commission Spring forecasts: general government debt as % of GDP, selected Eurozone countries & UK

Source: European Commission, “Spring 2017 economic forecast: steady growth ahead”, 11 May 2017.

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The Fed is set to tighten further

Even though the Bank of England and the ECB show little appetite for tightening policy, the Fed has already raised rates three times this cycle (December 2015, December 2016 and March 2017), and is expected to tighten further this year.41 The Fed cannot, of course, know how President Trump’s fiscal policies will work out at this juncture (more below). And it has no option but to bide its time in assessing the possible economic impact of Trump’s ambitions for a growth-enhancing programme of tax cuts/reforms and increased spending on infrastructure (with private sector involvement, the degree of which has been unspecified), as/when/if passed by Congress. Recent economic indicators have been mixed but, on balance, they suggest the economy is still doing well. The latest labour market report showed that non-farm payrolls rose by a greater-than-expected 211,000 in April and the unemployment rate fell to 4.4% (4.6% in March), a level not seen since May 2007.42-43 Granted the GDP figure for the 2017Q1 was weaker than expected, growing by just 0.7% (QOQ, annualised), compared with expectations of 1.0%.44 But the figure looks distorted by residual seasonality and the Fed has de facto indicated that it believes the “slowdown” to be temporary.45 Whilst the Fed did not raise interest rates at its 3 May meeting,46 there is a good chance that it will raise them again at the June meeting (13-14 June), with at least one further hike in 2017.47

US fiscal expansion?

As already indicated the Trump administration wishes to introduce a programme of tax cuts/reforms and infrastructure spending.48 Two relevant documents have recently been released. The first document was the President’s Budget Blueprint for fiscal year 2018 (FY2018, from October 2017 to September 2018), which was released on 16 March.49 (US President’s budgets only relate to spending and can be regarded as “wish lists” which may/may not be passed by Congress.) Key sentences from Trump’s “Message to Congress” were:50 • “The core of my first Budget Blueprint is the rebuilding of our Nation’s military without adding

to our Federal deficit. There is a $54bn increase in defense spending in 2018 that is offset by targeted reductions elsewhere.”

• “Our Budget Blueprint insists on $54bn in reductions to non-Defense programs”. In other words, there are no plans for a net increase in government spending.51 The second document was a one-page (literally) “sketchy” tax reform blueprint announced by Treasury Secretary Steve Mnuchin and the Director of National Economic Council (NEC) Gary Cohn on 26 April.52-53 The centrepiece was a planned reduction in the rate of corporate tax from 35% to 15%, whilst other proposals included changes to personal income tax, which would be levied in three bands, at 35%, 25% and 10% as against the current seven brackets. All in all the proposed tax cuts could reduce revenues by significant sums (the corporate tax reduction might cost $2.4trn over ten years according to the non-partisan Tax Research Centre), but the administration’s response was that the cuts would pay for themselves by stimulating extra growth, rather than adding to debt. Suffice to say, the claim that the tax cuts would be self-financing have been met with some scepticism and the proposals can be expected to meet considerable resistance (and horse-trading) in Congress.54 Concerning timing, the White House has said that President Trump would like to see Congress pass the tax reforms by the middle of autumn.55 This seems optimistic, and any implementing legislation could be delayed until next year.

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Given the vagueness surrounding the tax proposals, allied with potential political difficulties, it is impossible to know what fiscal boost (if any) may eventually be delivered by the Trump administration. But it seems reasonably certain that a sharp shift in the fiscal balance is “some way off” (if it happens at all). Doubtless, the Fed is operating on a “wait and see” basis. In addition, there are doubts about Trump’s claims to be able to significantly raise the growth of potential output. If a fiscal boost did not lead to a boost in potential output, and given the fact that the US economy is already close to full employment, then any fiscal stimulus may only lead to the Fed’s accelerating its planned series of rate rises (or indeed raising rates by more than it otherwise would have done).

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References

1. Bank of England, “Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 10 May 2017”, 11 May 2017

2. Bank of England, Inflation Report, May 2017. 3. Bank of England, “Inflation Report press conference, opening remarks by the Governor”, 11

May 2017 4. Ruth Lea, “The Bank: resilient growth and rising inflation, but no hurry to raise interest rates”,

Arbuthnot Banking Group, 13 February 2017, discussed the Bank’s February Inflation Report. 5. FT, “Rate rises hang on smooth Brexit, says BoE”, 12 May 2017. 6. Bank of England, “Monetary Policy Summary and minutes of the Monetary Policy Committee

meeting ending on 10 May 2017”, 11 May 2017 7. Ruth Lea, “GDP slowdown in 2017Q1 should be temporary”, Arbuthnot Banking Group, 8 May

2017. 8. ONS, “UK index of production: March 2017”, 11 May 2017. 9. ONS, “UK index of production: March 2017”, 11 May 2017. 10. ONS, “Construction output in GB: March 2017 & 2017Q1”, 11 May 2017. 11. ONS, “UK trade: March 2017”, 11 May 2017. 12. ONS, “UK labour market: May 2017”, 17 May 2017. 13. ONS, “UK labour market: May 2017”, 17 May 2017. 14. ONS, “UK productivity flash estimate: 2017Q1”, 17 May 2017. 15. HM Land Registry, “UK house price index summary: March 2017”, 16 May 2017. The UK’s four

countries continued to show different inflation rates in March: England (4.4%), Wales (4.3%), Scotland (0.7%) and Northern Ireland (4.3% (2017Q1)). In England, there was, as always, a significant range across the regions: East of England (6.7%), East Midlands (6.7%), West Midlands (6.5%), North West (6.2%), Yorkshire & Humberside (4.0%), South East (3.8%), South West (2.8%), London (1.5%) and the North East (-0.4%).

16. ONS, “House price index, UK: March 2017”, 16 May 2017. 17. ONS, “Retail sales (GB): April 2017”, 18 May 2017. Average store prices (including petrol

stations) increased by 3.1% (YOY) in April compared with 3.3% in March; the moderation reflected the slowing rate of inflation in fuel prices.

18. ONS, “UK labour market: May 2017”, 17 May 2017. The latest figure was 22,000 higher than the previous three months and 32,000 above the comparable period in 2016.

19. ONS, “UK consumer price inflation: April 2017”, 16 May 2017. The inflation rate for goods was 2.4% in April (2.5% in March), whilst the rate for services jumped to 2.8% in the month (2.2% in March). The core rate of inflation (excluding energy, food, alcoholic beverages & tobacco) was 2.4% (1.9% in March).

20. Ruth Lea, “Inflation is rising but keep it in perspective”, Arbuthnot Banking Group, 27 March 2017.

21. ONS, “UK producer price inflation: April 2017”, 16 May 2017. 22. Bank of England, “Agents’ Summary of Business Conditions: Latest update”, 17 May 2017. The

reports were compiled between late-March and mid-April 2017. 23. CBI, “Manufacturing output picks up pace” (Industrial Trends Survey), 19 May 2017. 24. Ruth Lea, “The ECB announces a “dovish” taper as the Eurozone continues to recover, albeit

modestly”, Arbuthnot Banking Group, 12 December 2016, for discussion of the ECB’s monetary policy, and when it was announced that QE would be reduced from €80bn a month to €60bn a month.

25. ECB, “Monetary policy decisions, press release,” 27 April 2017. The next monetary policy meeting on 8 June.

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26. Eurostat, “Flash estimate: GDP up by 0.5% in both euro area and EU28”, 16 May 2017. 27. BBC, “German economic growth speeds up”, 12 May 2017. 28. Eurostat, “Annual inflation up to 1.9% in euro area”, 17 May 2017. Core CPI (excluding energy,

food, alcohol & tobacco) was 1.2% (April), up from 0.7% (March). 29. European Commission, “Spring 2017 economic forecast: steady growth ahead”, 11 May 2017. 30. Ruth Lea, “The Eurozone economy: steady, if unspectacular, growth and higher inflation”,

Arbuthnot Banking Group, 27 February 2017, discussed the Commission’s February 2017 forecasts.

31. OECD, “Composite leading indicators (CLIs) point to stable growth momentum in the OECD area going forward”, 10 May 2017. Stable growth momentum was expected in the US, Japan, the UK and the euro area as a whole (including France and Italy). Growth was anticipated to gain momentum in Germany and Canada. Amongst major emerging economies, CLIs continued to indicate growth gaining momentum in Brazil and Russia, while the CLIs for China and India signalled stable growth momentum.

32. Daily Telegraph, “Major economies around the world are growing again, says OECD”, 11 May 2017, reported that Germany and Canada were picking up pace, while the rest of the G7 countries were growing at a stable pace.

33. Ruth Lea, “The ECB announces a “dovish” taper as the Eurozone continues to recover, albeit modestly”, Arbuthnot Banking Group, 12 December 2016, for discussion of the travails of the Italian banking system.

34. Ruth Lea, “The UK economy: still cautiously encouraging”, Arbuthnot Banking Group, 3 January 2017, for mention of the Italian banking system.

35. FT, “The EU economy from recovery to resilience”, 12 Mau 2017, reported that the “…biggest threat to eurozone is Italy, and specifically the risks arising from its banking system”.

36. European Commission, “Autumn 2016 economic forecast: modest growth in challenging times”, 9 November 2016.

37. European Commission, “Winter 2017 economic forecast: navigating through choppy waters”, 13 February 2017.

38. FT, “Brussels warns France over worsening deficit”, 12 May 2017. 39. Ruth Lea, “The Bank: resilient growth and rising inflation, but no hurry to raise interest rates”,

Arbuthnot Banking Group, 13 February 2017, discussed the Greek situation. 40. BBC, “Greece adopts more austerity measures in bailout bid”, 18 May 2017. 41. Ruth Lea, “Inflation is rising but keep it in perspective”, Arbuthnot Banking Group, 27 March

2017, discussed March rise. 42. Bureau of Labor Statistics, “Employment Situation”, 5 May 2017. 43. BBC, “US jobs growth accelerates in April”, 5 May 2017. 44. BBC, “US growth rate hits three-year low”, 28 April 2017. 45. BBC, “Federal Reserve: US economic slowdown temporary”, 3 May 2017. 46. Federal Reserve, “Federal Reserve issues FOMC statement”, 3 May 2017. 47. There has been some speculation that the Fed may wish to (partially) “shrink its balance

sheet” (i.e. QE reversal) at some point as well. 48. Economist, “Home-cooked policies”, 13 May 2017, identifies Trump’s economic strategy as

comprising protectionism, deregulation (including banking), tax reform and cuts, infrastructure spending and immigration controls. Tax cuts and infrastructure spending are clearly the most directly relevant (in the near-term) when considering implications for monetary policy.

49. Office of the Spokesperson, “President's Fiscal Year 2018 Budget Outline Released Today”, 16 March 2017.

50. Executive Office of the President, Office of Management and Budget, “America First: A Budget Blueprint to Make America Great Again” 16 March 2017.

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51. Economist, “Donald Trump’s “America First” budget would make deep cuts to domestic programmes”, 17 March 2017, reported that there would be increases in Defence, Homeland Security and Veterans Affairs, but cuts in the Environmental Protection Agency (EPA), the State Department, Commerce, Health & Human Resources and Justice.

52. White House, Office of the Press Secretary, “Briefing by Secretary of the Treasury Steven Mnuchin and Director of the National Economic Council Gary Cohn”, 26 April 2017.

53. Fox News, “President Trump’s tax plan: Here's what it includes”, 26 April 2017. 54. CommonDreams, “‘Truly dumb’: why $2.4trn Corporate Tax cut will not magically pay for

itself”, 25 April 2017. 55. BBC, “Trump seeks tax windfall for business”, 26 April 2017.

Annex

Table 1 Bank of England’s economic forecast summary: May 2017 (February 2017 in brackets)

2017 2018 2019 2020 GDP growth rate (%) 1.9 (2.0) 1.7 (1.6) 1.8 (1.7) Na (na) 2017Q2 2018Q2 2019Q2 2020Q2 CPI inflation rate (%) 2.7 (2.4) 2.6 (2.8) 2.2 (2.6) 2.3 (na) Unemployment rate (LFS, %) 4.7 (4.9) 4.7 (5.0) 4.6 (4.9) 4.5 (na) Bank Rate (market expectations)

0.2 (0.2) 0.3 (0.4) 0.4 (0.5) 0.5 (na)

2017Q4 2018Q4 2019Q4 CPI inflation rate (%) 2.8 (2.7) 2.4 (2.6) 2.2 (2.4) Na (na)

Source: Bank of England, Inflation Report, May 2017, modal projections for GDP, CPI inflation & LFS unemployment (tables 5A and 5G). Table 2 ONS & BoE releases: economic data tracker

Date Release Outcome 25Apr Public sector finances,

PSNB (FY2016) FY2016 PSNB £52.0bn (FY2016),

compared with £72.0bn (FY2015)

22 Apr Public sector finances, public sector net debt (PSND) (March)

2017Q1 £1,729.5bn (end-March 2017, 86.6% of GDP), compared with £1,606.0bn (end-March 2016, 83.6% of GDP)

28 Apr GDP (2017Q1,1st estimate)

2017Q1 0.3% (QOQ), 2.1% (YOY)

28 Apr Services (February) 2017Q1 +0.2% (MOM), +2.4% (YOY) 4 May Mortgage approvals for

house purchase (March), BoE

2017Q1 66,837 (Mar), compared with 67,936 (Feb)

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4 May Unsecured credit (March), BoE

2017Q1 +10.2% (YOY, Mar), +10.5% (YOY, Feb)

11 May Index of production (March)

2017Q1 Production (March): -0.5% (MOM), +1.4% (YOY)

11 May Manufacturing output (March)

2017Q1 Manufacturing output (March): -0.6% (MOM), +2.3% (YOY)

11 May Construction output (March)

2017Q1 Output (March): -0.7% (MOM), +2.4% (YOY)

11 May UK trade in goods and services (March)

2017Q1 Trade deficit: £4.9bn (March), £2.6bn (February)

11 May UK trade in goods (March)

2017Q1 Visible trade deficit: £13.4bn (March), £11.4bn (February)

11 May UK trade in services (March)

2017Q1 Services surplus: £8.5bn (March), £8.8bn (February)

16 May CPIH (April) 2017Q2 YOY inflation: 2.6% (April), 2.3% (March)

16 May PPI (output) (April) 2017Q2 YOY inflation: 3.6% (April), 3.6% (March)

16 May PPI (input) (April) 2017Q2 YOY inflation: 16.6% (April), 17.4% (March)

16 May PPI (input, imported) (April)

2017Q2 YOY inflation: 14.9% (April), 16.9% (March)

16 May House prices (March, official)

2017Q1 YOY inflation: 4.1% (March), 5.6% (February)

17 May Employment (3 months to March)

2017Q1 +122k (QOQ), +381k (YOY)

17 May Unemployment (3 months to March)

2017Q1 -53k (QOQ), -152k (YOY)

17 May Unemployment rate (3 months to March)

2017Q1 4.6%, compared with 5.1% a year earlier

17 May Vacancies (3 months to April)

2017Q2 Total vacancies: 777k, +22k (QOQ), +32k (YOY)

17 May Earnings (3 months to March)

2017Q1 2.4% (YOY, total pay), 2.1% (YOY, regular pay, excluding bonuses)

18 May Retail sales (April) 2017Q2 Volume: +2.3% (MOM), 4.0% (YOY)

Sources: (i) ONS website, (ii) Bank of England website. ONS unless otherwise stated.

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Table 3a European Commission forecasts: GDP growth (%), selected Eurozone countries & UK

Spring (May) 2017 Winter (February) 2017 2016 2017 2018 2016 2017 2018 EU 1.9 1.9 1.9 1.9 1.8 1.8 Eurozone 1.8 1.7 1.8 1.7 1.6 1.8 Of which: Germany 1.9 1.6 1.9 1.9 1.6 1.8 France 1.2 1.4 1.7 1.2 1.4 1.7 Italy 0.9 0.9 1.1 0.9 0.9 1.1 Spain 3.2 2.8 2.4 3.2 2.3 2.1 Netherlands 2.2 2.1 1.8 2.1 2.0 1.8 Greece 0 2.1 2.5 0.3 2.7 3.1 Ireland 5.2 4.0 3.6 4.3 3.4 3.3 Non-Eurozone:

UK 1.9 1.9 1.9 2.0 1.5 1.2 Table 3b European Commission forecasts: general government net lending (+), net borrowing (-) (%) of GDP, selected Eurozone countries & UK

Spring (May) 2017 Winter (February) 2017 2016 2017 2018 2016 2017 2018 EU -1.7 -1.6 -1.5 -1.9 -1.7 -1.6 Eurozone -1.5 -1.4 -1.3 -1.7 -1.4 -1.4 Of which: Germany 0.8 0.5 0.3 0.6 0.4 0.4 France -3.4 -3.0 -3.2 -3.3 -2.9 -3.1 Italy -2.5 -2.2 -2.3 -2.3 -2.4 -2.6 Spain -4.5 -3.2 -2.6 -4.7 -3.5 -2.9 Netherlands 0.4 0.5 0.8 -0.1 0.2 0.3 Greece 0.7 -1.2 0.6 -1.1 -1.1 0.7 Ireland -0.6 -0.5 -0.3 -0.9 -0.6 -0.6 Non-Eurozone:

UK -3.0 -3.0 -2.3 -3.4 -2.8 -2.5

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Table 3c European Commission forecasts: general government gross debt (% of GDP), selected Eurozone countries & UK

Spring (May) 2017 Winter (February) 2017 2016 2017 2018 2016 2017 2018 EU 85.1 84.8 83.6 85.1 84.8 83.6 Eurozone 91.3 90.3 89.0 91.5 90.4 89.2 Of which: Germany 68.3 65.8 63.3 68.2 65.5 62.9 France 96.0 96.4 96.7 96.4 96.7 97.0 Italy 132.6 133.1 132.5 132.8 133.3 133.2 Spain 99.4 99.2 98.5 99.7 100.0 99.7 Netherlands 62.3 59.0 57.2 62.2 60.2 58.3 Greece 179.0 178.8 174.6 179.7 177.2 170.6 Ireland 75.4 73.5 72.7 75.1 73.6 72.6 Non-Eurozone:

UK 89.3 88.6 87.9 88.6 88.1 87.0 Source: European Commission, “Spring 2017 economic forecast: steady growth ahead”, 11 May 2017.