May 2015 Economic Review: United Kingdom

The BOE is still one of the few central banks looking at a potential rate hike as their next policy move. But as revealed in the latest BOE inflation report, inflation for March went down to 0% while the economic growth forecasts for 2015 and 2016 were downgraded from 2.9% for both years to 2.5% and 2.6% respectively, giving the BOE cause to push back their plans for a rate hike to next year.

The BOE also forecasted that inflation would likely dip into negative territory in the coming months before climbing up near the end of the year as the effect of past drops in commodity prices is absorbed by the economy.

Still, the BOE has a glass-half-full outlook, looking at a dip in inflation as a reason for increased consumer spending down the road. As for the overall state of the economy, the BOE, through BOE Governor Mark Carney’s opening remarks, summed it up as follows: “the economy is growing, unemployment is falling, earnings growth is improving and there is no evidence of household spending being delayed.”

Great! But do the latest economic reports support this? Let’s find out!

Inflation

United Kingdom

United Kingdom

Hitting their respective inflation targets has been a pain in the neck for most central banks, especially after the oil price tumble last year. The BOE, though, has been getting the worse of it due to an appreciating pound which lowered the retail prices of imports and made British exports less competitive. But an appreciating Sterling is apparently no longer as severe a problem as in the past since it has already been taken into account as a significant and persistent headwind that “will continue to drag on the annual inflation rate before starting to drop out around the end of 2015.”

Okay, enough of that. Let’s take a look at the most recent data:

Headline CPI for April came in at -0.1%, the first negative reading since 1960. Core CPI, meanwhile, fell from 1.0% to 0.8%. Again, this has already been forecasted by the BOE, and BOE Governor Carney has been stressing that this temporary dip into negative territory was caused by the past drop in commodity prices and not by weakening domestic demand.

Consumer spending

Speaking of domestic demand not weakening, the BOE appears to be on the money since retail sales showed a better-than-expected reading, jumping to 1.2% in April. This, according to the ONS, “was the 25th consecutive month of year-on-year growth, the longest period of sustained growth since May 2008.”

While consumer spending appears to be robust, it still remains to be seen whether or not the pickup in spending will last since the previous month’s reading was downgraded from -0.5% to -0.7%, and the jump was caused by higher demand for summer clothes, thanks to warmer-than-average temperatures. But on a more upbeat note, data gathered by the ONS shows that all store types except predominantly food stores also showed growth.

Employment

As I’ve already discussed in my Jobs Data Update, the jobless rate slid down by 0.1% to 5.5% and average weekly earnings posted a better-than-expected read at 1.9% (1.7% expected, 1.7% previous), indicating that the labor market was more or less stable.

And even though claimant count change was worse-than-expected, falling by a mere 12.6K (-20.5K expected, -16.7K previous), the smallest decline since March 2013, it was still optimistic because a negative figure means less people are claiming unemployment benefits. Also, if we consider that the average earnings is going up, and the price of goods is going down (and may go down further), and more people are getting jobs, then that means potentially more consumer spending down the road.

Growth

Prelim Q1 2015 GDP only grew by 0.3% (0.6% previous) and revised Q1 2015 GDP actually showed no revision from the prelim reading.

Oh no! That’s horrible! Except, not really because even though it’s exceptionally modest, it’s still an expansion. And looking at the historical trend we can see that the 0.3% growth is actually the 9th consecutive quarter of growth, which is a good thing. And besides, this is only the prelim and revised GDP reading. Forex traders should only really start to worry if the final reading shows further downgrades or if the year-on-year reading falls below the 2.5% forecast.

Conclusion

The BOE’s claims that “the economy is growing, unemployment is falling, earnings growth is improving and there is no evidence of household spending being delayed” is backed up by the most recent economic data. Inflation also fell into the negative territory, just as forecasted by the BOE. But will inflation follow the BOE’s expectations that it will climb back up by the end of the year?

Overall, most forex traders seem to believe the BOE since Sterling has remained resilient in the last month and a half; a trend that’s likely to continue if U.K. data continues to roll and the BOE’s inflation predictions come to fruition.  Whether the data holds or not, we’ll have to wait and see–stay tuned!