Chief economist update: Trump trumps Brexit

Perhaps it's being drowned by the ongoing Trump/Xi "my tariff is bigger than yours" tit-for-tat, or the Trump/Stormy Daniels alleged dalliance, or the alleged Trump/FBI raid on the offices of Trump's personal lawyer, Michael Cohen ... but whatever it is, it had diverted investor attention away from Brexit.

For sure, Britain would be dragged into a trade war if it escalates, but at least Downing Street is not in Trump's crosshairs for the UK buys more goods from America. US Census Bureau data show that the US enjoyed a US$3.3 billion surplus with the UK in 2017 (up from US$1 billion in the previous year).

UK Prime Minister Theresa May and Bank of England (BOE) governor Mark Carney could at least focus on the domestic economy.

While UK GDP growth slowed to annual rate of 1.4% in the year to the December 2017 quarter (the weakest since the June 2012 quarter) from 1.8% in the previous quarter, more recent data indicate that the economy remains resilient to Brexit uncertainty.

The country's unemployment rate stood at a 42-month low of 4.3% in January; March consumer confidence improved to its best level since May 2017; and, February retail sales grew by 1.5% year-on-year, unchanged from January but also the fastest since August year.

The same goes for businesses with the CBI business optimism index jumping to a reading of +13 in the March quarter from -11 in the previous three-month period (the highest level in one year) backed up by the latest IHS Markit/CIPS UK PMI surveys that showed both manufacturing (55.1) and services (51.7) remain in expansion territory.

Last month's good news on Brexit - where the UK and the EU agreed on a transitional period will last from Brexit day on 29 March 2019 to 31 December 2020 - is surely a welcome development for both UK businesses and consumers. Although a final deal still faces a long, winding road, this recent breakthrough suggests both the UK and the EU are determined to achieve a smooth transition.

This could be one of the reasons behind the BOE's signalling that another small increase in interest rates is nigh. The British central bank last lifted the Bank Rate from 0.25% to 0.5% in November last year. Financial markets expect the BOE to announce another 25 basis point hike to 0.75% when it meets again on the 10th of May.

This is because while inflation has slowed - headline down to 2.7% in February (from 3.0% in January) and core at 2.4% (from 2.7%) - both measures remain above the BOE's 2% target that would gain more upward pressure given the UK's strong labour market dynamics - low unemployment and rising wages (up 2.8% in the year to the January quarter which is the fastest rate since the September quarter of 2015).

Read more: TrumpBrexitBOEBritainEUBank of EnglandBank RateCBIIHS Markit/CIPS UK PMITheresa MayUS Census Bureau
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