Weekly economic briefing: Trade shocks and busy cities

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Trump tariffs

The shock announcement on Friday that the Trump Administration will impose blanket tariffs on imports of steel and aluminium further underscores the point we made in our briefing last week on the TPP-11: that although much of the world is pushing for more trade integration, the US is shifting the opposite way.

Perhaps President Trump’s announcement shouldn’t have come as a surprise. It’s entirely consistent with his comments since the presidential election campaign. What we still don’t know, though, is how other countries will respond. Indeed, more concerning than these tariffs themselves is the prospect that this action will initiate a tit-for-tat trade war. Europe is already threatening retaliatory tariffs against the US. China could be next. Restraint on the US side seems unlikely, as President Trump doesn’t appear concerned about where this might lead. “Trade wars are good and easy to win,” he tweeted. As my colleagues wrote in Monday’s Australian Financial Review, a global trade war would be a bad thing for the Australian and global economies – with job losses and income losses resulting.

Sydney and Melbourne: it’s not just you, our cities really are getting busier

While it’s easy to remain focused on the daily headlines, it’s also worth paying attention to the quieter but seismic forces shaping our economy. Trends in population and jobs growth in our major cities, like the movements of tectonic plates, can go largely unnoticed for a long time, until they result in an eruption – an eruption of concern about congestion, affordability and liveability.

Data from the latest Census now allow us to look at recent trends in where people are living and working in our cities up to 2016. Those of us living in either Sydney or Melbourne already knew that they’ve become busier over the past few years. The Census data bear that out. About 100,000 more people were working in Sydney’s inner city in 2016 than in 2011. In Melbourne, which is smaller than Sydney, employment in the inner city actually increased by even more – about 115,000 workers over the same period.

That’s a lot more people who are either living in or commuting to the CBDs and inner suburbs of our two largest cities.

In Sydney, there were almost 35,000 more employed people living in the inner city in 2016 than there were in 2011; in Melbourne, where apartment supply has been even greater, there were over 45,000 more workers living in the CBD and inner suburbs since 2011.

In addition, a higher share of workers are commuting to the inner cities each day than they were in 2011 (see charts 1 and 2). The increase in jobs in the inner cities is disproportionately higher than in the middle and outer suburbs of Sydney and Melbourne, leading to 65,000 more commuters into inner Sydney and 55,000 more workers travelling to inner Melbourne each day.

That trend is not surprising, as highly skilled service industries are growing more quickly than more traditional employers, such as manufacturing, and such industries benefit from being close to clients and networks. Indeed the data confirm this, with a substantial share of commuters to the inner cities working in either the ‘professional, scientific and technical’ or the ‘finance and insurance’ industries.


Chart 1: Share of employed persons living in Greater Sydney who are employed in Inner Sydney (City and Inner South)

Source: Australian Bureau of Statistics


Chart 2: Share of employed persons in living Greater Melbourne who are employed in Inner Melbourne

Source: Australian Bureau of Statistics


The upshot of that, though, is that there is even more strain on our transport system as a rising share of workers commute into the inner cities to work – a trend that we expect to continue over the next decade. It is no surprise then that congestion has been an issue for some time. In one sense, it’s the price of economic success. But it’s also an issue that governments must address if the costs are not to keep rising inexorably – costs to liveability and housing affordability, yes, but also to the future success of our cities as productivity powerhouses.

For more information on the Australian brief, please contact co-authors David Rumbens and Nicky Wonder.


UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

UK consumer: good and bad news

  • In a sign of the tough trading conditions on British high streets two well-known retail names, Toys R Us and Maplin, fell into administration last week.
  • UK consumer spending has slowed markedly since the summer of 2016, putting pressure on retailers and depressing overall economic activity. With consumption accounting for roughly two thirds of the UK economy, this has been a major contributor to the post-referendum slowdown in growth. Last year UK household spending grew at its slowest rate in five years.
  • This is not just a high street spending story. Car sales have fallen by almost 11% since last year, although some of the decline is accounted for by plummeting sales of diesel cars. Housing transactions are also running well below the levels of a year ago.
  • The slowdown has been driven by rising living costs and lacklustre wage growth.
  • The Brexit-induced decline in sterling has pushed up import prices and driven inflation from -0.1% in late 2015, to 3.0% this January. With wage growth steady at around the 2.0%-mark, real spending power has been badly squeezed.
  • Consumer confidence has fallen back too. The decline has been more pronounced among those with a university degree, perhaps partly because of concerns about the effects of Brexit. Among those with just a school education confidence has marginally improved. This may reflect the benefits of falling unemployment and rises in the National Living Wage.
  • Consensus forecasts suggest that the consumer squeeze has further to run. The latest forecasts predict 1.2% growth in consumer spending in 2018, a marked slowdown from the 2.9% average annual growth in 2015 and 2016, and lower than last year’s 1.5% rate.
  • One bright spot for the consumer is the job market. The UK unemployment rate stands at 4.4%, close to a 43-year low and lower than most advanced economies.
  • After a long period of weakness, pay pressures seem to be stirring. Employers are reporting recruitment difficulties and official data shows that there are 823,000 unfilled jobs, a 17-year high.
  • The rate of job changing, which slowed significantly since the financial crisis, has picked up. The number of individuals moving job-to-job in the final quarter of 2017 was the highest in ten years. Wage pressures often come through first in pay for new hires and so it is this time as well. People moving from one job to another have been receiving an average pay rise of over 6%, close to a post financial-crisis high.
  • The other good news is on inflation which seems at or near a peak. A year ago consumers faced a toxic combination of rising commodity prices and a major depreciation of sterling. Both these inflationary trends have abated. Commodity price inflation has eased and sterling has appreciated slightly since last summer and is trading at 6% above its post-referendum low. The impact of past sterling weakness should drop out of the inflation numbers soon. Import price inflation has fallen from a peak of over 20% in January 2016 to 3.5% today.
  • So, with inflation set to ease and wage pressure stirring, the worst of the earnings squeeze may be over. But this is unlikely to herald a swift upturn in consumer spending. A number of factors which boosted consumer spending in recent years have become less supportive.
  • With savings at low levels, and banks tightening up lending criteria, spending is unlikely to get much of a boost from consumers running down savings or from a new credit binge. Interest rates are heading up, many expecting it to rise by 25 basis points(bp) in May, so credit is slowly becoming more expensive.
  • Unemployment is low, but new job creation is unlikely to maintain the heady pace it has seen in recent years. Finally, the massive boost to consumer spending power that came from payouts for the mis-selling of payment protection insurance, are petering out.
  • The result is that growth in UK consumer spending in the next couple of years is likely to remain pretty lacklustre. This is causing something of a role reversal. The supposedly free spending Brits are likely to increase spending less than the supposedly cautious German consumers over the next two years.
  • The worst of the wage squeeze may be coming to an end. But uninspiring growth in consumer spending means that the UK will have to look more to exports, manufacturing and investment to drive economic activity.

PS: In our Year Ahead webinar last month we identified protectionism and a sharp adjustment in equity markets as two risks facing the global recovery. Recent news on both fronts has been worrying. Last Thursday President Trump announced that he would seek to impose global tariffs of 25% on steel and 10% on aluminium imports, in a move that seems likely to trigger retaliation from trading partners. The EU has announced that it will now consider imposing “safeguard” tariffs on imported US steel and aluminium. The move has led to a sharp fall in equities, especially in the US, as investors are worried that reprisals from other countries could spark a trade war and damage growth.


The FTSE 100 ended last week down 2.3% at 7,070 as global equities were weighed down by the news that President Trump is to implement import tariffs.


International economic briefing by Ian Stewart

Economics and business

  • Germany’s top court ruled that the country’s cities have the right to ban diesel cars
  • The US ISM Purchasing Managers Index (PMI) showed that manufacturing activity expanded in February at its fastest pace since 2004
  • Demand for gas in the UK soared to its highest level in five years and prices soared to a 12-year high during last week’s ‘big freeze’
  • A fall in the number of US pregnancies could indicate an upcoming recession, according to the National Bureau of Economic Research in the US
  • Private equity buyouts are at their highest levels since 2007 as the sector is under pressure to deploy record sums of cash
  • The Financial Conduct Authority introduced new rules for banks to help borrowers with persistently high credit card debts
  • The UK universities minister has called on universities to compensate students for the loss of teaching time as a result of striking lecturers
  • Eurostat’s research on regional inequality across the EU found that GDP per capita in London is 610% of the EU’s average, followed by Luxembourg at 257%
  • Japanese unemployment fell to an almost 25-year low in January, as the ratio of open jobs to applicants remains at its highest level since the early 1970s
  • Vladimir Putin promised a massive increase in spending on infrastructure, social security and healthcare in his annual State of the Nation speech
  • UK shop prices fell in February, in a sign that inflationary pressures from a weaker pound were abating, according to the British Retail Consortium
  • US consumer confidence rose to its highest level since 2000, pushed higher by economic and labour market prospects, according to the Conference Board
  • UK consumer credit growth turned negative in January, for the first time since 2013, with consumers repaying debt

Brexit and European politics

  • Early exit polls in the Italian election suggest a hung parliament with ex-PM Silvio Berlusconi’s right-wing coalition winning the most seats
  • Theresa May conceded that access to EU markets would be “less than it is now” in a speech setting out her Brexit vision
  • The UK Labour Party announced a shift in its Brexit policy, calling for the UK to permanently remain in the EU’s customs union after it leaves the EU
  • Tony Blair, the former Labour Prime Minister, said he believes there is 50% chance that Brexit may not happen and that “reform in Europe [could get] Britain to change its mind”
  • The European Commission published a draft Brexit withdrawal agreement setting out the items agreed with the UK in December over its exit terms
  • The document included a last-resort scenario under which Northern Ireland would remain aligned with Europe’s single market rules after Brexit
  • The draft withdrawal agreement requires the UK to remain subject to the European Court of Justice’s rulings indefinitely after Brexit
  • The UK government conceded that EU migrants who arrive in Britain during a Brexit transition period will have the right to settle in the UK permanently
  • Olivier Blanchard, the former IMF chief economist, said lack of wage bargaining in the EU is more of a threat to the euro than the absence of a complete banking or fiscal union
  • The Dutch parliament voted to abolish advisory referendums over fears of their potential disruptive effects and that they undermine democracy

And finally…

A drunk American Uber user was hit with a $1,635 bill after falling asleep and embarking on a 300-mile journey across three states. He had ordered an XL Uber car, which can carry up to six people, and had set the destination to ‘home’ instead of where he was supposed to be staying – taken for a ride

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