Economic Snapshot: The United Kingdom

Greetings, forex friends! The pound has been showing signs of strength lately, as Pip Diddy pointed out in his latest Top Forex Market Movers of the Week. And pound bulls can thank the BOE’s switch to a more neutral stance on monetary policy, as well as higher uncertainty in the Euro Zone due to Trump’s victory, with focus switching to events such as the so-called Italeave. If that also made you wonder how the U.K.’s economy is doing lately, then today’s Economic Snapshot is here to help you out.

Note: As with all Economic Snapshots, there are nifty tables 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.

Growth

  • The first estimate for Q3 2016 GDP growth came in at +0.5% quarter-on-quarter.
  • This is a better reading than the expected +0.3% rate of expansion.
  • However, Q3’s reading is slower than Q2’s final reading of +0.7%.
  • There are no clear trends for the quarter-on-quarter reading, but U.K. GDP has been growing on a quarterly basis for 15 consecutive quarters already.
  • Year-on-year, Q3 2016 GDP grew by 2.3%.
  • This is faster than Q2’s downwardly revised reading of 2.1%.
  • In addition, Q3’s rate of expansion is the fastest in five quarters.
  • Furthermore, annual GDP has been improving for three consecutive quarters after reaching a low of +1.7% back in Q4 2016.
  • Again, this is the first estimate, so only the output approach is used – breakdown by expenditure is not yet available.
  • The slower quarter-on-quarter growth was due mainly to the 1.0% fall in manufacturing production (+1.6% previous).
  • Although the 1.4% drop in construction output (-0.1% previous) was also a factor.
  • However, these were offset by the 0.8% increase in services (+0.6% previous) and the 5.2% in mining output (+2.8% previous).
  • Year-on-year, the 0.2% fall in construction output (+0.4% previous) and the slower 0.4% growth in manufacturing output (+1.0% previous) were the main downward contributors.
  • These were easily offset by the faster 3.0% growth (+2.7% previous) in the service sector, though.
  • According to the GDP report, “This is the first release of GDP covering a full quarter of data following the EU referendum.”
  • Additional commentary from the GDP report also noted that “The pattern of growth continues to be broadly unaffected following the EU referendum with a strong performance in the services industries offsetting falls in other industrial groups.”

Employment

  • The number of claimants for unemployment-related benefits increased by 9.8K in October.
  • This is much more than the expected 1.9K increase.
  • Also, the number of claimants have been increasing for three months in a row (+7.1K, +5.6K, +9.8K).
  • Despite the increase in claimants, the jobless rate for the July-September period fell to 4.8%.
  • This is the lowest reading since the July-September 2005 reporting period.
  • The employment rate, meanwhile, held steady at the all time high of 74.5%, so the downtick in the jobless rate seems to be healthy.
  • As for wages, nominal average weekly earnings (bonuses included) grew by 2.5% year-on-year in September, with a three-month average of 2.3%.
  • The 2.5% month-on-month increase finally ended two straight months of weakening nominal average weekly earnings.
  • If bonuses are stripped, nominal average weekly earnings grew by 2.7% year-on-year in September, with a three-month average of 2.4%.
  • The 2.7% increase is the fastest in 14 months while the three-month average is the fastest in 12 months.
  • The faster increase in nominal earnings also gave real average weekly earnings (adjusted to take inflation into account) a boost, since it ended two months of weaker increased by coming in at 1.6% (+1.5% previous).
  • If bonuses are stripped, however, real wages grew by 1.7%, which is the same rate of increase as last time.
  • Real wages have been in positive territory since September 2014, so there has been actual growth in purchasing power.

Inflation

  • Headline CPI increased by 0.1% month-on-month in October (+0.2% previous).
  • Headline CPI has been advancing at a weaker pace for two consecutive months as of
  • October, after peaking at 0.3% back in August.
  • Year-on-year, headline CPI increased by 0.9% in October (+1.0% previous), missing expectations that it will increase by 1.1%.
  • Despite the slight dip, the +0.9% reading is still the second highest reading since November 2014.
  • As for the core reading, it weakened from 1.5% to a five-month low of 1.2%.
  • The biggest drag to the monthly headline reading was the 0.5% decline in the price of food and non-alcoholic beverages clothing, as well as the 1.0% fall in the cost of healthcare and medicines.
  • Year-on-year, 10 out of the 12 major CPI components saw decreases, which is why both the headline and core reading deteriorated.

Business Conditions & Sentiment

  • Total industrial production in the U.K. increased by 0.3% year-on-year in September.
  • This is the weakest increase in six months.
  • Also, industrial output growth has been weakening for two straight months as of September.
  • The main drags were the weaker 0.2% growth in manufacturing output (+0.5% previous) and the 4.0% fall in electricity output (-0.8% previous).
  • Quarter-on-quarter, manufacturing output fell by 0.9% while total industrial output contracted by 0.5%.
  • For reference and as mentioned earlier, the first GDP estimate had manufacturing output falling by 1.0%, which resulted in total industrial output falling by 0.4%.
  • Total industrial output therefore fell a bit harder than expected.
  • This may drag down the second estimate for GDP, given that industrial output accounts for around 14.6% of GDP.
  • Looking forward, Markit’s manufacturing PMI reading for October tumbled from 55.5 to 54.3.
  • According to commentary from Markit, the lower reading was due to the slowdown in output growth.
  • Surveyed companies remained optimistic however, since they “reported higher demand from both domestic and export clients.”
  • The higher demand, particularly from overseas, was due to the pound’s recent depreciation, which “aided efforts to increase inflows of new export business, resulting in new orders from the USA, the EU and China.”
  • Moving on, Markit’s construction PMI reading cimbed from 52.3 to 52.6, which is the highest reading since March of this year.
  • Commentary from the PMI report noted that the stronger reading was due to “another solid increase in residential work.”
  • However, additional commentary noted that new business growth “was only moderate in October and still much weaker than seen during the first quarter of 2016.”
  • As for Markit’s services PMI, it jumped from 52.6 to 54.5, which is the highest reading since January of this year.
  • Commentary from the PMI report was also pretty optimistic.
  • Incoming new businesses, for instance, “rose at the fastest rate in nine months.”
  • Also, the service sector continued to generate jobs, with employment increasing for the third month running.

Consumer Spending

  • Net lending to individuals in September increased by £4.7 billion, which is the same as last time and broadly in line with the six-month average.
  • Meanwhile, the number of mortgages approved for home purchases only came in at 62.93K, up from 60.98K, but below the six-month average of 64.84K.
  • Moving on, consumer confidence for October was at -3, so Britons are still somewhat pessimistic.
  • Consumer confidence has bee in negative territory since April 2016.
  • Despite the slight pessimism in October, retail sales volume surged by 1.9% month-on-month in October.
  • This is substantially better than the expected 0.5% increase.
  • Also, this is the biggest month-on-month increase in three months.
  • Things look even better year-on-year, with retail sales jumping by 7.4%.
  • This is way better than the consensus reading of +5.3%.
  • Moreover, this is the biggest year-on-year jump since April 2002.
  • The details of the retail sales report also showed that the increase was broad-based, with all retail store types reporting increases, excepting department stores.

Trade

  • The U.K.’s trade deficit widened from £3.768 billion to £5.221 billion in September.
  • The trade gap has been widening for the second month running after recovering June’s trade gap, which the widest since July 2015.
  • September’s wider trade deficit was mainly due to imports jumping by 2.53% to a record high of £50.63 billion.
  • Exports falling by 0.45% to £45.41 was also a factor in the wider trader gap.

U.K Economy: Growth

U.K Economy: Employment

U.K Economy: Inflation

U.K Economy: Business Conditions & Sentiment

U.K Economy: Consumer Spending & Sentiment

U.K Economy: Trade

Putting it all together

Overall, the British economy seems to be doing okay despite the Brexit referendum. Growth remains relatively strong on both an annual and quarterly basis. Even better, Q4 is off to a good start, because of the surge in retail sales during the month of October.

The labor market, meanwhile, has already exceeded the BOE’s own projections. According to the November Inflation Report, the jobless rate is expected to be at 4.9% by the end of the year. But the reading for the July-September period was already at 4.8%, which is the lowest reading since the July-September 2005 period. And it’s a healthy downtick, too, since the employment rate held steady at the all time high of 74.5%.

As for inflation, it unfortunately dipped to 0.9% year-on-year. For reference, the BOE’s projection is that annual inflation would be at 1.3% by the end of 2016. On the brighter side of things, the PMI reports are indicating that the lower pound is having an inflationary effect. So time will soon tell if this will translate to an actual increase in CPI. After all, the BOE did say that it’s relying on the inflationary effects of the lower pound, and that CPI may even temporarily overshoot the BOE’s 2.0% target.

 


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