ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 1 ASMI International Activity Report ASMI Northern Europe FY16/17 October 1 to December 31, 2017 General Economic Update The UK and the European Commission have reached agreement specifically on citizens’ rights in December 2017 that allows Brexit discussions to move onto trade talks early in 2018. The agreement locks in the progress made so far allowing for further technical details to be ironed out whilst the second phase of talks takes place. Whilst politically the UK believe this signifies significant progress in the talks, the negotiation is far from complete and it is still presumed that the UK will leave the EU on March 31, 2019 with a transitional or implementation period after this date. It is hoped that the UK and EU will sign off the formal ‘divorce’ agreement together with the outline of a trading agreement by October 2018 to allow time for approval ahead of the March deadline. Whilst both parties would welcome more than an outline of trading terms, the complexity and detail required suggest that this is unlikely. There remains no solution for the border position between Ireland and Northern Ireland and this creates significant pressure for the UK Government who are reliant on the Northern Ireland DUP party for their majority in the House of Commons. The May Government could still face significant challenges around this issue in the months to come. In an attempt to boost exports post-Brexit, it is believed that the UK government is exploring membership of the Trans-Pacific Partnership and has held informal discussions. If membership was granted, Britain would be the first member of the trade agreement which does not have borders on the Pacific Ocean or South China Sea. The US withdrew from the TPP in 2017. The UK is not allowed to make any trade deal before it formally leaves the UK and any agreement would also not take place until the revision of the TPP following the US withdrawal. ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 2 The squeeze on UK disposable income has continued to impact consumer confidence which in December reached the lowest level since the Brexit referendum. The CBI Business Optimism or business confidence index dropped to -11 in the fourth quarter of 32017 from +5 in the previous quarter, the lowest reading since the third quarter of 2016 driven by deteriorating investment intentions for capital investment and reduced sentiment for exports. ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 3 As predicted, UK interest rates increased by +0.25pp in November, the first increase in more than 10 years. This follows the latest official statistics showing that the UK economy is growing at its slowest pace since 2013. More recent news in the UK macroeconomic data has been limited and mixed and it is believed to be too early to reach a comprehensive conclusion of the impact of this rate rise on the economy. It is anticipated that further rate increases should be expected in 2018 to further stimulate the economy. The £:$ exchange rate continued its rebound in the quarter showing more stability than recently and maintaining a position between 1.31 and 1.35. It is expected that Sterling could continue to rally in 2018 as markets perceive a reduction in the Brexit risk. Across the Eurozone, economic growth outstripped that of the USA setting up 2017 as the best year for the currency area in a decade. Although the strong growth for the region was powered by Germany and France, the Netherlands was on track for an expansion in 2017 of 3.3%, the strongest the country had seen since 2007. Meanwhile, consumer price inflation across the region has decreased to 1.4% in line with market expectations. This rate is down from the start of the year rate of 1.8% in January 2017. Food price inflation for the Euro area remains at 2.2% at year-end although this belies differing fortunes in the Euro countries. Food price inflation remains a key issue in the UK with price inflation here resulting from the reliance of the UK food system on imported product and a currency weakness outlined above. Economic Forecasts for Calendar 2018: Source OECD ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 4 UK Economic growth is expected to continue to be weak in 2018 and 2019 with private consumption subdued as inflation holds back purchasing power. Although unemployment is expected to remain low, import growth is projected to fall due to weaker private consumption. A transitional deal with the EU is expected to reduce uncertainty. High consumer debt growth, together with stagnant household income, is a major financial stability risk. Netherlands GDP growth is expected to remain strong and broad based in 2018 and into 2019 driven by private consumption and a strong labor market. Business investment is expected to be vibrant driven by improved economic sentiment. Wages and inflation are projected to rise gradually with labour market reforms expecting to deliver more inclusive growth. Finland Growth is expected to remain strong in 2018-19 but is likely to slow as private consumption softens due to wage moderation and rising inflation. Economic recovery will continue, although a rapidly aging population will continue to strain public finances and limit growth. Increasing household indebtedness will continue to be a source of vulnerability although less so than in the other Nordic countries. ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 5 Sweden Low interest rates and increasing public spending are fueling a booming economy. Growth is expected to remain solid albeit slowing slightly. Lack of constructible land and labour shortages will slow residential investment. Investment in skills and the welfare system are ongoing and the fiscal position is strong with budget surplus and low debt. Easing of the planning system and housing reform are expected to stabilise house prices and increase labour mobility. Ireland The Irish economy is expected to continue to grow into 2018 as domestic demand remains solid. Labour market tightening is expected to exert pressure on wages which will feed into higher inflation. Output is expected to expand more slowly due to high external uncertainty over the final Brexit outcome. Private sector debt remains high with poor prospects of debt repayment. Retail Summary In the UK, the latest shopper sentiment data shows that shopper confidence is weakening. Three in ten shoppers (30%) expect to be worse off in the year ahead however, that still leaves nearly half (48%) of all shoppers believing their financial situation will not change in the next year. People are increasingly shopping around different stores, with more of a value focus, looking for the cheapest products even if it takes more time. The Consumer Prices Index 12-month inflation rate was 2.8% in September 2017, up from 2.7% in August 2017; it was last higher in March 2012. The main contributors to the increase in the rate were rising prices for food and recreational goods. These upward effects were partially offset by Food price inflation: % monthly Source Trading Economics United Kingdom 4.1% Ireland -1.2% Finland -0.3% Sweden 2.5% Denmark 2.0% Netherlands 2.5% Euro Area 2.2% EU 2.8% ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 6 downward contributions from clothing prices. After a brief fall, the fish CPI has reached a high of 13.6% which is significantly above the meat CPI of 3.2%. 18.38 12.25 6.13 0.00 Percentage change over12 months -6.13 -12.25 Jul-17 Jul-16 Jul-15 Jul-14 Apr-17 Apr-16 Oct-16 Apr-15 Oct-15 Apr-14 Oct-14 Oct-13 Jun-17 Jun-16 Jan-17 Jun-15 Jan-16 Jun-14 Jan-15 Jan-14 Mar-17 Mar-16 Feb-17 Mar-15 Feb-16 Mar-14 Feb-15 Feb-14 Nov-16 Dec-16 Aug-17 Sep-17 Nov-15 Dec-15 Aug-16 Sep-16 Nov-14 Dec-14 Aug-15 Sep-15 Nov-13 Dec-13 Aug-14 Sep-14 Aug-13 Sep-13 May-17 May-16 May-15 May-14 CPI (overall index) Food Meat Fish The rising cost of household groceries means shoppers are increasingly turning to supermarket’s own-label products at the expense of branded goods. Over the 12 weeks ending September 9, 2017, consumer spend on supermarket’s own-label products rose 5.5%¹ year-on-year, nearly five times the growth in spend on branded products (up 1.2% year-on year). The average increase in sales across all grocery products was 3.5%. The return of inflation means shoppers are increasingly turning to supermarkets’ own-label products to help manage their weekly grocery spend,” said Mike Watkins, Nielsen’s UK head of retailer and business insight. “Own-brand sales are growing across all major food retailers but fastest at the discounters – Aldi and Lidl – and at the Co- operative, Iceland, M&S and Tesco.” In addition, the proportion of consumer spend that went on items on promotion rose slightly to 28% with roughly 60% of these promotions being price cuts. This “resonates well with shoppers but may also indicate that the industry is leaning a bit more on short-term price cuts to help smooth inflationary price increases. Watkins also said that “the big supermarkets will need to keep on their ASMI International Activity Report NORTHERN EUROPE October to December 2017 p. 7 toes” because nearly two thirds of households now visit a discounter at least once every three months, partly due to the raft of new store openings.