This Week In The Economy: UK PM Faces Revolt Over Brexit Deal, Eurozone Growth Woes, US Banks Easing Standards To Compete For Business

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Your TWITE author is indulging in a bit of favoritism today, leading with news out of the United Kingdom because … well in the middle of all the thunder and lightening over the past two years there appears to be some sunlight on the horizon. Assuming Prime Minister Theresa May survives a vote of no confidence triggered by rebellious Tory lawmakers.

This week the UK announced it had reached a preliminary deal with the European Commission on its withdrawal from the EU. The draft agreement covers issues such as how much money the UK will pay to the EU, a 21-month transition period after Brexit day on March 29, 2019, and commitments on the rights of EU citizens in the UK and UK citizens living in the EU. The agreement does not cover trade, as that will be dealt with during the transition period.

While May’s cabinet initially signed off on the agreement, the transition period, during which “the EU will treat the UK as if it were a Member State, with the exception of participation in the EU institutions and governance structures,” sparked a revolt among hardliners in her own party — resulting in the resignation of two cabinet members (including chief Brexit negotiator Dominic Raab) and the submission of letters forcing a ‘no confidence vote’ next week.

So what happens next? Assuming May survives the vote next week and talks don’t have to go back to square one, the EU heads of state will review and vote on the draft deal November 25, and then — more importantly — the UK parliament will give its thumbs up or disapproval of the agreement at a yet-to-be determined date in December.

The Office of National Statistics this week reported the unemployment rate for the period between July to September ticked up to 4.1%, however, average weekly earnings for British employees increased by 3.2% excluding bonuses, and by 3.0% including bonuses, compared to a year earlier.

On the inflation front, consumer prices — including owner occupiers’ housing costs — was up 2.2% in October 2018 compared to a year ago, unchanged from September 2018. Excluding housing costs, the Consumer Prices Index 12-month rate was 2.4% in October 2018, also unchanged from September 2018.

Staying on this side of the Atlantic, Euro Area data released this week underlines the current struggles of the monetary union. After growing by 0.4% in Q2, a new report showed the eurozone GDP grew by just 0.2% in Q3 — slowed down by a 0.1% contraction in German economic activity (mainly poor auto sales). Industrial Production declined by 0.3% in September compared to the previous month, while the bloc’s exports to the rest of the world fell by 1% in September compared to the same month last year.

European Central Bank President Mario Draghi agreed in a speech Friday that, “we have recently seen a loss in growth momentum.” He blamed the temporary disruption in car production in Germany due to new emission standards, as well as weaker trade growth.

While the slowdown in global trade might be momentary, Draghi warned it could become long-lasting “if trade uncertainty rises and dampens euro area export performance, in particular owing to protectionism.”

The second condition would be if uncertainty among businesses about external demand spills over into domestic demand through confidence and investment channels.

“For now, there is little tangible evidence that the moderation in growth has affected business investment. But there is some evidence that those euro area firms that are most likely to be affected by proposed tariffs have reduced their rate of capital spending. Moreover, the slowdown in imports has particularly affected capital and intermediate goods, which might signal that firms are scaling back their investment decisions.” — ECB President Mario Draghi

Returning to domestic news, Federal Reserve Chair Jerome Powell spoke at an event in Dallas this week, during which he declared himself very happy about the economy’s current trajectory, and described economic activity as being in “good shape.”

He did warn, however, that the U.S. economy could face headwinds in the coming year from slower growth elsewhere in the global economy, the receding impact of the 2017 tax cuts law (combined with the surge in government spending) and the expected impact of interest rate increases by the Fed.

Meanwhile a separate report from the Fed shows many banks are watering down their standards for loans to businesses and households — spurred by the stronger economy and fierce competition for customers.

The Senior Loan Officer Opinion Survey said banks eased their standards and terms for commercial and industrial (C&I) loans even as they witnessed weaker demand for such loans on balance. The same was true in terms of mortgage lending, with banks again reporting a lowering of standards on most categories of residential real estate loans while experiencing weaker demand for such loans.

“ All domestic banks that reportedly eased standards or terms on C&I loans over the past three months cited increased competition from other lenders as an important reason for banks’ easing their standards or terms. In addition, significant net fractions of banks indicated that a more favorable or less uncertain economic outlook and an increased tolerance for risk were important reasons for banks’ easing.” — Fed Survey

Activity in the world’s third largest economy contracted in the third quarter, hit by natural disasters and a decline in exports. Q3 GDP growth declined by 1.2% compared to the same period a year ago and by 0.3% compared to Q2. Export volume fell 1.8% from Q2, the fastest decline in over three years.

A devastating earthquake and typhoon were among the series of disasters to hit Japan this year, prompting the bigger than expected contraction.

Mexico’s central bank this week increased its target interest rate to 8%, citing the significant drop in the value of the peso.

Fueled mostly by investors’ concerns regarding the incoming administration, as well as a subsequent move by rating agencies to downgrade Mexico’s sovereign risk outlook from stable to negative, the central bank warned that: “The most relevant is that the peso exchange rate may continue to be subject to pressures stemming from higher external interest rates and other external and domestic factors.”

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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