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May makes first move on migration

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This week’s papers are likely to be dominated by Brexit-related news again. The House of Lords continues its review of the Bill to trigger Article 50, with peers lining up to state that they plan to add amendments. Despite the Government continuing to publicly state its wish to have zero changes, it appears many Tory peers are planning a rebellion, either to add their own amendments or to support Lib Dem or Labour additions. With Conservative Lords significantly in the minority, there is very little the Government can do but watch as the unelected second house adds substantial changes to the Bill which will force it back through the Commons in March, thus further delaying the process of leaving.
 
At this stage the two amendments thought to be brought and passed are related to Parliament’s having a vote on the final post-negotiation deal and to upholding the rights of EU citizens currently residing in the UK. These were also heavily debated by MPs in the Commons and thoroughly rejected.
 
Although the rights of those already here are in limbo, Theresa May is widely expected to announce that, as of the day Article 50 is triggered, all EU migrants will be subject to a new visa regime along with restrictions to residency and welfare. Details of what this would imply are unconfirmed, but it wouldn’t be a stretch to assume that the rules would default to those currently in place for non-EU citizens.
 
Last week saw net migration figures released, and these showed a massive drop in numbers coming from outside the EU and from Eastern Europe. This brought the rolling 12-month figure down from 335,000 to 273,000. At the same time there was a six-fold increase in applications for residency rights to the UK. Although somewhat contradictory, these phenomena are understandable given the fog that continues to surround future protections for EU citizens in the UK. Expect this trend to continue over the next year as many decide to secure their rights via permanent residency approval, leave - or never arrive in the first place.
 
Unfortunately, there is no data available on the occupations of the departing individuals, but it would be prudent of the Government to make a swift formal announcement on the occupations to be added to the skilled jobs list. Otherwise, the country may find itself with an inadvertent but chronic shortage of certain highly skilled vocational staff.
 
The uncertainty caused by all of the above is one of many factors that have fed into a reversing trend in the UK interest rate markets. The 5-year quarter-on-quarter swap rate has fallen from 0.95% at the end of January to 0.66% today. This has not been a one-off drop but a continuous decline, displaying worrying sentiment in the markets about the near future for the UK economy. A fortnight ago, as was discussed in our bulletin, retail sales were drastically below expectations. Last week this was followed by annual GDP falling short of estimates, and meanwhile a series of large corporates have been missing profit targets. Despite the Bank of England recently signalling that they have revised upwards the growth expectations of the UK for both 2017 and 2018, markets appear to have a more bearish tone and, based on the data, it is hard to disagree.
 
The prime-time entertainment of Donald Trump’s presidency continues tomorrow as he makes his first speech in Congress on policy. All are eagerly hoping for details regarding his proposed tax reforms and infrastructure plans. To date, the majority of information has been supplied 140 characters at a time and usually in the middle of the night via his Twitter feed, so this will hopefully provide some greater insight into what is actually being planned in the West Wing.
 
Today it is also being reported that Trump has established a team of individuals to analyse the costs and benefits to the US of being part of the WTO – particularly with regard to dispute resolution. Given Trump’s recent willingness to tear up global trade agreements, this is a very worrying development for global trade. For us in the UK it could be catastrophic, for if the US decided to leave the WTO it would be likely to unravel entirely. The danger is that the current worst-case scenario for a post-Brexit deal is deemed to be the WTO standard. Without that base, there exists a whole new level of uncertainty in a world outside the EU – and it turns out Donald isn’t Theresa’s BFF after all.
 
This week is fairly light on data releases in the UK. Manufacturing PMI is released on Wednesday, with Services and Construction PMIs following on Friday. Services are expected to have a small slow-down from 54.5 to 54.0, while the other two are expected to remain broadly constant.
 
The eurozone also releases its PMI figures this week on the same days as the UK figures. Data is expected to show the same levels as in January. Germany’s inflation figures are out on Wednesday. Further increases are anticipated, with the expectation being that it may reach over 2.0% for the first time in nearly four years.
 
Just before Trump makes his speech to Congress, US Q4 GDP figures are released with an anticipated increase in the growth rate from 1.9% to 2.1% for the year. Then on Friday, the US also releases its PMI data to round off the week.

All views expressed here are the author’s own and are based on information and data available at the time of writing.

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