Greetings, forex friends! The pound has been one of the weaker currencies recently, and with the MPC policy rate decision and statement coming up this Thursday (April 14, 12:00 pm GMT), I thought that now would be a good time to do an economic roundup for the United Kingdom.
Note: As with all Forex 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.
- The United Kingdom’s final Q4 2015 GDP grew by 0.6% quarter-on-quarter, which is slightly faster than Q3’s 0.4% expansion.
- There are no clear trends, but GDP has been growing for 12 consecutive quarters now.
- Year-on-year, Q4 2015 GDP grew by 2.1%, a down-tick from Q3’s 2.2%.
- This marks the fourth consecutive quarter that annual GDP has been growing at a slower pace.
- Annual GDP has also failed to trend higher for six quarters now after peaking at 3.0% back in Q2 2014.
- GDP growth for all of 2015 was 2.3%, which is a bit slower than 2014’s 2.9%, but is still the second-strongest post-recession growth on record.
- Using the expenditure approach, the 0.6% growth (+0.6% in Q3) in household consumption (a.k.a. consumer spending) was the the main driver, contributing 0.4% to quarter-on-quarter GDP growth
- The biggest drag was net trade, which subtracted 0.3% from quarter-on-quarter GDP growth, thanks to the 0.1% growth in exports being overwhelmed by the 0.9% increase in imports.
- Another major drag was the 1.1% drop (+0.4% in Q3) in gross fixed capital formation, which subtracted 0.2% from quarter-on-quarter GDP growth.
- The drop in gross fixed capital formation was mainly due to business investments falling by a painful 2.0% after growing by 1.3% back in Q3.
- In terms of output, the United Kingdom’s GDP was fueled almost exclusively by the service sector, which added 0.7% to quarter-on-quarter GDP growth.
- Other components like agriculture or construction had negligible contributions, but total production subtracted 0.1% from GDP growth.
- The jobless rate during the three months to January held steady at 5.1% for the third consecutive recording period.
- The current jobless rate is apparently lowest reading in almost ten years.
- If bonuses are included, nominal average weekly earnings grew by 2.5% year-on-year in January, with a three-month average of 2.1%.
- If bonuses are stripped, nominal average weekly earnings only grew by 2.2% year-on-year in January, with a three-month average also of 2.2%.
- No clear trends for nominal wages, but real wages (adjusted to take inflation into account) have been in positive territory since early 2014, so there has been growth in purchasing power.
- The number of claimants for unemployment-related benefits was down by 18K in February, which is smaller than the 28.4K reduction in the number of claimants back in January.
- The number of claimants has been decreasing for three straight months now, after four consecutive months of increases.
- The month-on-month headline reading for February’s CPI increased by 0.2% after a rather disappointing 0.8% drop previously.
- The year-on-year headline reading for February CPI held steady at the one-year-high of 0.3%, missing expectations that it will come in at 0.4%.
- The fact that it’s a one-year high is saying a lot about the United Kingdom’s inflation problems.
- Meanwhile, the core reading was at 1.2, the same reading as the previous month.
- The biggest drags to the annual headline reading were the 1.1% drop (-0.7% previous) in the transport component and the 2.3% decline in the price of food and non-alcoholic beverages.
- As for the increase in the monthly reading, that was mainly due to the 1.3% increase in the price of clothing and footwear, which easily offset the 0.2% slide for the cost of food and non-alcoholic beverages, as well as the 0.4% decline in the price of tobacco and alcoholic products.
Business Conditions & Sentiment
- Total industrial production in the United Kingdom fell by 0.5% year-on-year in February, which is the largest fall since August 2013.
- In terms of trend, the February reading resumed the downtrend after January’s 0.1% increase broke a two-month slide, with the peak at +1.6%.
- The largest negative contributor to the drop in industrial production was the 1.8% slump in manufacturing production, which is the largest ever since July 2013.
- Manufacturing production has been contracting for nine consecutive months now, with 10 of the 13 manufacturing sectors reporting declines in output.
- Despite contracting manufacturing output, Markit’s manufacturing PMI for March remained above 50.0.
- It even climbed to 51.0 after dropping to a 34-month low of 50.8 back in February.
- Commentary from the manufacturing PMI report noted that domestic demand remained robust, with the output of consumer goods rising moderately, but overseas demand sank lower for the third straight month.
- Markit’s services PMI reading for the March period climbed higher to 53.7 after previously dipping to a 35-month low of 52.7.
- The current reading is still the second-weakest in six months, though.
- Commentary from the services PMI report warned that “growth will remain subdued moving into the second quarter of the year” since new business orders rose at the “weakest rate since January 2013.”
- At least the service sector can be relied on to provide jobs since service providers “continued to expand workforces in March.”
- Markit’s construction PMI for March held was unchanged at 54.2, with commentary from the report noting that new business growth continued to moderate while job creation “softened across the construction sector … and sub-contractor usage dropped.”
Consumer Spending & Sentiment
- Retail sales volume during the February period contracted by 0.4% month-on-month after a 2.3% drop, but grew by 3.8% year-on-year.
- The recent year-on-year reading is lower than January’s 5.4%, but it’s good to know that the annual reading has been growing for 34 consecutive months now.
- The amount spent by consumers in the retail trade industry also increased by 1.4% year-on-year.
- However, average store prices fell for the 20th straight month, this time by 2.5% year-on-year, which is not gonna be good for CPI down the road.
- The 5.3% drop in prices charged by fuel stores was the main drag, so lower oil prices haven’t fully passed through the British economy yet.
- This is followed by the 2.8% drop of store prices at textile, clothing, and footwear stores.
- The GfK consumer sentiment index held steady at zero, which means that Britons are neither optimistic or pessimistic overall.
- The sub-indices show that Britons are still confident about their personal financial situations, but they’re worried about the general economic situation.
- The GfK attributes this concern over the general economy to jitters because of the looming Brexit referendum.
- The United Kingdom’s trade deficit narrowed from £5.23 billion to £4.840 billion in February.
- This was due to exports rising by 0.9% (+0.1% previous) to a three-month high of £42.06 billion while imports only grew ever so slightly by 0.04% (+3.7% previous) to £46.90 billion, a 14-month high.
- The current trade deficit is still the second-widest in 14 months, though.
- The rise in exports was primarily due to a large increase in chemical exports.
- There was a large increase in imports of consumer goods other than cars (6.3% vs. 0.9% previous), however, which will likely continue to apply deflationary pressure on CPI.
Putting it all together
The United Kingdom is still doing okay (in terms of growth), but the year-on-year reading for GDP has been trending ever lower. And the available reports for the Q1 2016 months don’t really paint a very upbeat picture since industrial production is trending lower and the services PMI report imply that there was a slowdown in the service sector. The latter is bad because details of the GDP report have been showing that the service sector has been powering the United Kingdom’s growth (in terms of output).
Trade was also a major drag back in Q4 2015, and the available trade data for the Q1 2016 months ain’t exactly pleasant since the deficits in January and February are respectively the the widest and second-widest in 14 months.
Inflation is also another problem since it remains subdued and will likely remain subdued since Britons seem to be using the increase in their real wages to buy foreign consumer goods, which are cheaper and therefore deflationary.
Given all that and the ever-looming Brexit referendum, there’s a good chance that BOE officials will sound dovish during the upcoming MPC policy rate decision and statement, which may convince forex traders to kick the pound lower. However, there’s always a chance that BOE officials may try to sound balanced or neutral again just like in the previous MPC statement.