Greetings, forex friends! As Pip Diddy noted in his latest Top Forex Market Movers of the Week, the pound was one of the stronger currencies last week, thanks to a couple of positive economic reports. And if that made you wonder how the U.K. is doing overall, then this Economic Snapshot can help you out.
Note: As with all Economic Snapshots, there are nifty table at the bottom, so you can skip to those if you’re a forex trader who’s in a hurry. The bullet points provided highlight the underlying details and trends that give the numbers their proper context, however.
- The first estimate for Q2 2016 GDP growth came in at +0.6% quarter-on-quarter.
- This is better than Q1’s +0.4% rate of expansion.
- Also, the actual Q2 reading was a tick higher than the expected pace of +0.5%.
- There are no clear trends, but GDP has been growing on a quarterly basis for 14 consecutive quarters now.
- Year-on-year, Q2 2016 GDP advanced by 2.2%, which is faster than Q1’s 2.0%.
- The annual Q2 reading is the highest in a year.
- It also marks the second consecutive quarter of improving annual GDP growth after dipping to 1.8% in Q4 2015.
- Again, this is the first estimate, so only the output approach is used – breakdown by expenditure is not yet available.
- In terms of output, the 2.1% rebound in industrial production (-0.2% previous) was the reason for the faster rate of quarter-on-quarter expansion.
- The jump in industrial production was the biggest since 1999, thanks mainly to strong manufacturing output.
- The rebound industrial production added +0.30% to total GDP growth (-0.05% previous), offsetting the slower growth in services (+0.37% vs. +0.50% previous)
- Looking at the other components, the faster contraction in construction was the main drag (-0.4% vs. -0.3% previous), subtracting 0.03% from total GDP growth.
- The number of claimants for unemployment-related benefits shrank by 8.6K in July.
- This is the first decrease in 5 months.
- Meanwhile, the jobless rate for the April-June period held steady at 4.9%.
- This is the lowest reading since the July-September 2005 reporting period.
- In addition, the employment rate climbed to an all time high of 74.5%.
- As for wages, nominal average weekly earnings (bonuses included) grew by 2.2% year-on-year in June, with a three-month average of 2.4%.
- The three-month average has been trending higher for the second straight months, thanks to the 2.6% increase back in April.
- If bonuses are stripped, nominal average weekly earnings grew by 2.2% year-on-year in June, with a three-month average of 2.3%.
- Real average weekly earnings (adjusted to take inflation into account) grew by 1.7% year-on-year, which is a three-month low.
- This marks the second consecutive month of deterioration in real wages after peaking at +2.3% in April.
- If bonuses are stripped, real wages grew by 1.8%, which is also a three-month low.
- However, even if bonuses are excluded, real wages still marked the second consecutive month of poorer readings.
- Still, real wages have been in positive territory since September 2014, so there has been actual growth in purchasing power.
- Headline CPI sank 0.1% into negative territory on a monthly basis in July (+0.2% previous).
- This is the first negative reading in six months.
- Year-on-year, headline CPI increased by 0.6% in July, beating expectations that it will hold steady at 0.5%.
- July’s reading happens to be the highest on record since November 2014.
- It also marks the second straight month of higher readings.
- As for the core reading, it weakened from 1.4% to 1.3%.
- The biggest drags to the monthly headline reading was the 3.4% decline in clothing and footwear costs, as well as the 0.3% fall in the price of food and non-alcoholic beverages.
- Meanwhile, the biggest driver was the 1.6% increase in transportation costs, thanks mainly to the 15.9% jump in air fares.
- As for the annual reading, the main drag is still the food and non-alcoholic beverages component since it subtracted 0.30% from the headline CPI reading.
- The transportation component only added 0.06% to CPI, but it actually helped propel the headline reading higher since the transportation index subtracted 0.30% from the headline CPI reading back in July 2015.
Business Conditions & Sentiment
- No post-referendum hard data yet since the latest industrial production numbers are for the month of June.
- Industrial production in the U.K. increased by 0.1% month-on-month and by 1.6% year-on-year during the June period.
- Both the monthly and the annual readings were able to beat their previous readings of -0.6% and +1.4% respectively.
- Still, total industrial output for Q2 is around +2.1%, which is unchanged from the value used in the first estimate for Q2 GDP, so no downward or upward revision to GDP is expected.
- Looking forward, Markit’s manufacturing PMI reading for July was revised from a 41-month low of 49.1 to 43-month low of 48.2.
- According to commentary from Markit, “the decline in production was the steepest since October 2012, with contractions across the consumer, intermediate and investment goods sectors.”
- Markit cited the Brexit referendum for the deterioration in overall business conditions and sentiment.
- On a more optimistic note, additional commentary stated that “the level of incoming new export orders in the UK manufacturing sector rose for the second successive month in July.”
- This was apparently due to “the recent depreciation of the sterling exchange rate and efforts by companies to secure new contracts.”
- Moving on, Markit’s construction PMI for July ticked lower from 46.0 to 45.9, which is the lowest reading since 2009.
- Commentary from Markit noted that the weakness was broad-based and that “economic uncertainty following the EU referendum” was the likely reason for the slowdown.
- Finally, Markit’s july services PMI plunged from 52.3 to 47.3, which is the lowest reading since March 2009.
- The future also doesn’t look very bright for the services sector since incoming new businesses “declined for the first time since the end of 2012” and that the pace of contraction was “the fastest since March 2009.”
- Also, Markit Chief Economist Chris Williams concluded that the PMI readings “are collectively signalling a 0.4% quarterly rate of decline of GDP.”
- Net lending to individuals in June came increased by £5.2 billion, which is the largest increase in 3 months.
- Meanwhile, the number of mortgages approved for home purchases only came in at 64.76K, down from 66.72K.
- This is the lowest reading since May 2015.
- The stronger lending in June was a heads up for the stronger consumer spending in July, even though consumer confidence plummeted to -12. a very low reading not seen since 2013.
- Headline retail sales volume for the month of July increased by 1.4% month-on-month, beating expectations of a mere 0.1% increase.
- This jump came after a 0.9% fall in June.
- Year-on-year, retail sales volume grew by 5.9%, which is a faster increase than June’s 4.3% increase.
- In addition, it’s the fastest increase since November 2015.
- Moreover, the increase in retail sales volume was broad-based, with all store types printing increases on both a monthly and annual basis.
- On a more disappointing note, average store prices fell by 0.8% month-on-month and by 2.0% year-on-year.
- However, total amount spent still increased by 1.6% month-on-month and by 3.6% year-on-year, so consumer spending remains robust.
- The U.K.’s trade deficit widened from £5.084 billion to £4.227 billion in June.
- The trade gap has been widening for the second month running, with the current reading being the widest since July 2015.
- The wider trade deficit was due to imports jumping by 3.99% to a record high of £48.92 billion.
- This was able to easily offset the 2.38% increase in exports.
- Between the Q1 months and the Q2 months, the trade deficit widened £0.4 billion to £12.5 billion, so net trade is expected to be a drag when the breakdown using the expenditure-approach is released.
Putting it all together
Overall, the British economy was doing okay in the run-up to the June Brexit referendum. And while the Brexit referendum caused consumer confidence to plunge, consumer spending actually strengthened after the referendum. This is evidenced by the strong retail sales readings for July.
Also, July’s CPI dipped on a monthly basis, but the annual reading actually strengthened. And according to the BOE’s August Inflation Report, inflation is projected to strengthen further, thanks partially to the pound’s recent plunge.
Furthermore, the additional easing measures introduced by the BOE were “designed to provide additional support to growth.” However, this is expected to come “at the cost of a temporary period of above-target inflation.”
Moving on, post-referendum hard data for industrial production are not available yet. However, Markit’s PMI readings all worsened to multi-year lows. Commentary from Markit even noted that Q3 GDP looks set to contract by 0.4% quarter-on-quarter.
Still, it’s a bit too early to conclude how the U.K.’s economy will evolve in Q3. We can conclude, though, that Q3 is off to a good start, based on the available hard data.