Forex Snapshot: U.K. Economy

Missed the recent top and mid-tier reports from the U.K.? Worry not, forex warriors! I’ve summarized the main components right here on today’s snapshot!

Growth

  • Q4 2015 GDP grew by 0.5%, up from Q3 2015’s 0.4% growth.
  • Annualized figure at 1.9%, lower than Q3 2015’s 2.1% growth.
  • 2015 GDP expanded by 2.2%, lower than 2014’s 2.9% growth but still matches 2013’s numbers as the second-strongest post-recession year.
  • The economy is relying heavily on the service sector, as concerns over weakening global demand and potential Brexit weigh on manufacturing and construction industries.

Employment

  • Unemployment rate remains at 5.1%, the lowest since mid-2005.
  • Claimant counts dropped by 14,800 in January after December’s 4,300 decline.
  • Both the employment rate and number of job vacancies have jumped to record highs in January.
  • Wage growth dropped to its slowest rate since February 2015.
  • Low inflation is affecting the workers’ pay raise prospects.

Inflation

  • Annualized consumer prices up to a one-year high of 0.3% while core prices settled from 1.4% to 1.2% in January.
  • Headline figures show 0.8% decline (vs. -0.7% in December) while core consumer prices dipped by 1.0% (vs. -0.8% in December).
  • The increase is mostly due to oil falling less than it did last year. Alcohol and tobacco also got a big boost on beer discounts while clothing and footwear dropped due to weather.

Businesses

  • The manufacturing and construction industries have failed to contribute to the 2015 GDP.
  • Reading PMIs: A reading above 50.0 means industry expansion while a reading below 50.0 hints at contraction.
  • Manufacturing PMI surprised at 52.9 in January, its fastest pace since June 2014.
  • Construction PMI dropped to 55.0, its weakest in nine months, thanks to the weakest increase in housebuilding and commercial property work.
  • Services PMI at showed its strongest employment growth in three months but also its weakest 12-month outlook in three years.
  • Worries over weak global demand, volatile financial markets, and possible Brexit are weighing on business sentiment.

Consumers

  • Retail sales in November were boosted by Black Friday promos.
  • Retail sales in December is the lowest since September 2014, thanks to early holiday discounting.
  • Retail sales in January is the highest in two years, thanks to post-holiday discounting and huge jumps in clothing and computer demand.
  • Consumer confidence numbers reflect optimism over personal finance, but not over the U.K. economy.
  • Investors needed to see a good bounce in January to show that low inflation and wages aren’t affecting consumer demand.

Trade

  • Trade deficit fell to 2.71B GBP in December, down from 3.17B GBP deficit in November.
  • Exports down by another 0.8% while imports dropped by 3.6%.
  • Weak global demand and strong GBP aren’t helping UK’s trade numbers, but recent weaknesses in the pound are expected help prop up exports again.

Housing

  • Government enjoyed its biggest tax surplus since 2008 thanks to a large volume of income tax receipts.
  • The government needed “very strong” tax receipts in January to meet Chancellor’s George Osborne’s targets of a budget surplus by 2019 – 2020.

Government Spending

  • Rightmove and Halifax house prices still show price increases, as housing demand outpaces supply.
  • High employment, low interest rates, and limited housing supply are pushing house prices to their post-financial crisis prices. However, muted wage growth and climbing house prices could soon ease demand for housing.

Want a real snapshot of all those points above? Here’s a neat chart for ya!

UK

What’s next for the U.K.?
One look at the figures above tells us that there’s a reason why the Bank of England (BOE) is one of the few central banks that are contemplating interest rate hikes. What’s holding Mark Carney and his gang back though, is the possibility that the economy’s recovery may be imbalanced.

Consumers continue to feel optimistic about the economy, as evidenced by strong retail sales and housing demand. On the other hand, concerns such as weakening global demand, strong local currency, and the possibility of a “Brexit” are keeping businesses from taking risks.

These worries have already kept the manufacturing and construction industries from contributing to economic growth in 2015 and are now threatening the U.K.’s exports and strong service industry.

Right now the BOE is keeping close tabs on consumer activity, the other major driver of the U.K.’s GDP. More specifically, the central bank wants to see steady employment and wage growth to help keep the consumers happy enough to stimulate inflation. They already know that the Brits love their shopping. The BOE just wants to make sure that they’ll have enough jobs and wages to continue doing it.

  • Raicemon George

    That is really a wonderful and helpful calculated observation of UK economy.

    • Thanks for compliment! I really appreciate it. Oh, if you’re watching the pound, you may want to check out my latest write-up on the recent Brexit deal.
      http://www.babypips.com/blogs/piponomics/forex-brexit-20160221.html

      • Raicemon George

        Thanks man.. For recommending those articles. well and neatly written. Got some insights from them.. But from a price action perspective, I believe sterling is going have a lower low or a higher low test of the ‘end of the Jan’ bear low, if at all later on sterling is going to strengthen against usd. As the price action is choppy recent days, market is also on a break out mode right. well.. who knows for sure.. but I am expecting a test of the the bear low on daily chart.

        • Looks like lower lows for now due to London Mayor Boris Johnson’s pro-Brexit stance. Good call on that one! Very nice! I hope you were able to ride it down.

          • Raicemon George

            Seems like Brexit is not so good for UK right? . Yes.. I did make .5% on that ride down. I should have left at least a part of it running. Good momentum right.. can’t figure our if its a real break out or an exhaustion. lets wait and see.

          • Sweet! A win is still a win, so congratulations! And yep, a potential Brexit scares away investors and traders are also speculating heavily that an actual Brexit will be bad for the UK and the pound.

            GBP/USD is currently at 9-year lows…
            http://www.reuters.com/article/us-global-forex-idUSKCN0VV1B6

            But I’m no longer as bearish on GBP/USD because we’re at significantly low levels, even on the weekly and monthly charts.

          • Raicemon George

            Thank you 🙂 . I don’t understand why people are afraid of brexit. I think it would be good for the UK economy, if it would exit EU. What do you think? But the market is panicking like the UK is exiting from another ERM. Anyhow I am not ready to bottom pick and I am also very much bearish about sterling, as I believe in market’s inertia. The market almost always try to do what it has been doing so far. yea.. it is just an assumption..

          • A Brexit, in my opinion, would be good for the UK in the long run. But in the shorter-term, a Brexit is likely gonna be bad for the UK economy. After all, half of UK exports go to the EU, so a Brexit is gonna strain trade and hurt the already weakening manufacturing sector. I think that’s what most people are focusing more on – the shorter-term implications for the UK and the EU too.

            Oh, I’m not bottom picking. I’m still long-term bearish. Sorry if I sounded that way. But we are meeting major support areas, so I’m playing short-term counter-trend bounces for now, which is a bit risky but rewarding if you play it right.

            Below’s an example of what I mean. That’s my chart for GBP/JPY from yesterday. I had two scenarios in mind: (orange scenario) if price breaks support at 155.00, then I wait for a pullback then short, but (red scenario) if price stabilizes and goes higher, then I go long. Obviously, the red scenario played out. Got in at 155.10, closed half when I got 200 pips earlier and the other half is still active now. I’ve set the stop of the remaining half to break-even. Hopefully price will reach my target at 159.30.

          • Raicemon George

            Yea, I agree with you on brexit. If UK exit EU, in the long run it would be beneficial for UK.

            I am sorry if I sounded like bottom picking is a wrong strategy. I know that with right risk reward ratio, good traders like you make money using that strategy. It is just that I can’t use that strategy because I burnt my hands earlier few times and I am impatient. I found myself trapped out of good trades way too earlier.

            Thank you for taking time on illustrating your GBP/JPY strategy. I hope you would reach your final target next week. I would probably go short if I would find good setups on GBP/JPY.

            By the way, My name is Raicemon and it really nice meeting you. May I know your name?

          • It’s a real pleasure to meet and chat with you Raicemon. Please just call me Forex Gump. I know you’re asking for my real name, and I sincerely mean you no disrespect by withholding it, but I’m rather shy in person unlike some of my fellow writers here, namely Jack the Pipper (real name: Jack Crooks) and Queen Cleopiptra (real name: Raghee Horner). In fact, the only one more shy than I am is probably Forex Ninja.

            Again, I sincerely mean no disrespect, and I hope you don’t mind that I remain incognito.