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Next week's economics: 19-23 Nov

Next week's figures could show that the eurozone economy is slowing down, and this is hurting the UK
November 15, 2018

The eurozone economy is slowing down. Purchasing managers’ surveys next week might well confirm last month’s message, that overall economic growth has slowed to a two-year low while manufacturing growth is at a four-year low. This would mean that GDP growth in the fourth quarter could be even lower than the 0.2 per cent officially reported for the third quarter. Economists are blaming this on the uncertainty caused by the trade war and the recent Italian elections. However, slower monetary growth has been warning us of a cooling off in the economy for some time.

The eurozone’s woes are spilling over into the UK. Next week’s CBI survey of manufacturers is likely to show that order books are weakening and that expectations of output growth are at a three-year low. This isn’t entirely due to weak exports. Last month’s survey showed that domestic orders are faltering in part because companies are reluctant to invest. 

Although UK growth might be slowing down now, the recent expansion has boosted tax revenues. This should be evident in Wednesday’s figures, which should show that public sector net borrowing so far this financial year is around £25bn, £13bn less than in the same period last year. This would be consistent with borrowing for the whole of this financial year also being around £25bn; the second half of the financial year usually sees little borrowing thanks to big tax revenues in January.

However, thanks to weaker growth and higher spending on the NHS, government borrowing is expected  to remain around this level for the next few years. This, however, is not a problem. It implies that there will be a surplus on the primary account (which excludes debt interest payments). And with real interest rates negative, this should allow the debt-GDP ratio to fall over time.

In the US, meanwhile, we should see a small rise in durable goods orders, which would be a sign of good ongoing growth.

There will, though, be a cloud on the horizon. Wednesday’s data could show that sales of existing homes have been trending down for several months. Although prices are still rising – the same figures should show an annual rise of around 4 per cent – this betokens a cooling in the housing market. This is not yet a cause for concern. But investors should watch out for further developments.