As Pip Diddy noted in his latest weekly recap, the pound got a good beating because of a bunch of negative economic reports that weakened expectations for a BOE rate hike. And if that made you wonder how the U.K.’s overall economy is faring, then today’s Economic Snapshot is just for you.
- The first estimate for Q2 2017 GDP growth came in at 0.3% quarter-on-quarter.
- This is a tick faster than the +0.2% rise registered in Q1.
- Year-on-year, however, GDP only grew by 1.7% in Q2, which is slower compared to Q1’s +2.0% pace.
- This is the slowest annual rate of expansion in four quarters.
- On a more upbeat note, U.K. GDP has been growing on a quarterly basis for 18 consecutive quarters already.
- Again, this is the first or preliminary estimate, so only the output approach is used – breakdown using the expenditure is not yet available.
- With that said, the 0.5% quarter-on-quarter growth in the service sector (+0.1% previous) was more than able to offset the 0.4% contraction in total industrial production (+0.1% previous), which is why quarterly growth grew at a faster pace.
- As for the slower year-on-year reading, that was due to total industrial production suddenly contracting by 0.4% after surging by 2.3% previously and because construction output decelerated to +0.8% after printing +2.8% in Q1.
- However, GDP continued to grow because agricultural output recovered (+1.7% vs. -0.2% previous) while services posted a 2.3% rise, matching the pace of annual growth in Q1.
- The weakness in industrial output was broad-based, with weaker manufacturing output (+0.3% vs. +2.5% previous) and negative output from mining (-2.1% vs. 1.1% previous) and utilities (-4.4% vs. 0.7% previous).
- The number of people claiming unemployment-related benefits fell by 19.4K in July.
- This is the first decline after four straight months of increases.
- Meanwhile, the jobless rate for the April-June period (Q2 essentially) ticked lower from 4.5% to 4.4%.
- This is a new record low since comparable records began in 1975, which is great.
- Also, the reading is in-line the BOE staff forecast of 4.4%.
- Furthermore, the improvement in the jobless rate was healthy since the employment rate actually rose from 74.9% to 75.1%.
- This is a new record high for the employment rate since comparable records began in 1971.
- As for wage growth, nominal average weekly earnings (bonuses included) grew by 2.8% year-on-year in June.
- This is the strongest reading for wage growth in seven months.
- However, the impressive wage growth loses its shine when bonuses are excluded.
- Bonuses soared by 17.2%, and if bonuses are exluded, then nominal wages only grew by 2.1%.
- This is slower than the +2.3% printed in May.
- This gives a three-month average of 2.1%.
- However, the BOE’s downgraded staff forecast for regular wages in June (earnings less bonuses) was for the three-month average to come in at +2.2%.
- In real terms (inflation is taken into account), average weekly earnings (bonuses included) recovered by 0.5%.
- This ends two consecutive months of negative readings.
- However, if bonuses are excluded then real average earnings fell by 0.4%, the same rate of decline as last time.
- This marks the fifth consecutive month of negative readings for real regular wage growth.
- Headline CPI fell by 0.1% month-on-month in July.
- This is the first negative monthly reading in six months.
- Looking at the details of the CPI report, 5 of the 12 CPI components printed declines, with the 2.9% decline in the price of clothing and footwear being the main drag.
- As for the other CPI components, education was flat for the month while the remaining six, which included the transport component, printed increases.
- A closer look at the transport component shows that the 1.3% decline in the price of the fuels and lubricants sub-component was actually the single biggest drag to CPI.
- However, the 15.9% surge in the price of airfare helped to offset this, resulting in a net positive contribution from the transport component to CPI.
- Year-on-year, headline CPI rose by 2.6% in July, which is the same annual rate as in June.
- However, the consensus was for the faster 2.7% rise.
- Even so, the headline reading does meet the BOE staff forecast of +2.6% for July, so it’s not that bad from the BOE’s perspective.
- As for the core reading, it also maintained the 2.4% pace since the weaker increase in the cost of all services (+2.6% vs. +2.7% previous) was offset by the stronger increase in the cost of non-energy industrial goods (+2.2% vs. +2.0% previous).
Business Conditions & Sentiment
- Markit’s manufacturing PMI reading for July bounced from 54.2 to 55.1, which is better than the expected reading of 54.4.
- The rebound ends two straight months of ever poorer readings.
- According to commentary from Markit, the rebound was due to “a significant boost from the trend in new export business, as foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010.”
- Moreover, job creation in July “was among the best registered over the past three years.”
- On a more downbeat note for future inflation, “Input prices rose at the slowest pace in over a year, and to a significantly lesser extent than the survey-record increase seen in January.”
- However, companies continue to pass on higher input costs to customers, so “Output charges rose for the fifteenth consecutive month.”
- Moving on, the U.K. construction PMI dropped from 54.8 to an 11-month low of 51.9 in July.
- The consensus was only a soft tumble from 54.8 to 54.3.
- Commentary from Markit blamed the poorer reading on “lower volumes of commercial building and a softer expansion of housing activity.”
- In addition, there was “a reduction in new business volumes for the first time since August 2016, which acted as a headwind to job creation and input buying across the construction sector.”
- Moreover, jobs growth in the construction sector saw the weakest increase in 11 months, according to Markit’s findings.
- The overall weakness in the construction sector “was attributed to heightened economic uncertainty and subdued confidence among clients.”
- As for the U.K.’s services PMI, it rose from 53.4 to 53.8 in July, which is slightly bette than the consensus that it would climb to 53.6.
- Commentary from Markit noted that the higher reading was due mainly to “the pace of job creation edging up to its strongest for a year-and-a-half.”
- Although the new orders growth being “slightly stronger than June’s nine-month low” also helped.
- However, Markit also noted that “a sizable monitory [of the survey respondents] also noted that Brexit-related uncertainty continued to weigh on their growth prospects for the year ahead.”
Consumer Spending & Sentiment
- Consumer confidence deteriorated further in July, falling from -10 to -12 index points.
- This is the poorest reading in 12 month and marks the second straight month of ever poorer readings.
- Also, consumer confidence has been in negative territory since April 2016.
- Despite deteriorating consumer confidence, retail sales volume managed to chalk a 0.3% increase in July.
- Unfortunately, the reading for June was downgraded from 0.6% to 0.3%.
- Moreover, most store types actually reported either a fall in retail sales or a weaker increase in retail sales.
- However, the 1.5% increase in retail sales reported by predominantly food stores was able to offset this.
- The weaker decline in sales from automotive fuel stores also helped (-1.1% vs. -2.4% previous).
- Year-on-year, retail sales rose by 1.3%, which is within expectations.
- However, this is a drastic slowdown from June’s +2.8%.
- Moreover, the slowdown was broad-based, with all retail store types printing weaker annual increases in sales or even declines.
- The U.K.’s trade deficit widened from £2.516 billion to £4.564 billion in June.
- This is the biggest deficit in nine months.
- The wider deficit was due to exports falling by 0.68% £49.388 billion while imports surged by 3.27% to £53.952 billion.
- Since we now have the trade data for June, we now know that the total trade deficit in Q2 was £8.944 billion, which is 1.19% bigger compared to the £8.839 billion deficit in Q1.
- As such, we now know that trade was a drag on Q2’s quarterly GDP growth.
Putting it all together
The BOE was forced to downgrade its growth forecasts for 2017 during the August BOE statement, partly because of the weak year-on-year growth in Q2, which is the weakest in four quarters.
The GDP breakdown using the expenditure approach isn’t out yet, but based on the available trade data, net trade was very likely a drag on Q2 growth, which doesn’t really support the case of the hawks in the BOE.
After all, BOE hawks want to hike because they fear an inflation overshoot but they’re not worried about the weakness in consumer spending because:
“Although consumer spending appeared to be softening, as expected, growth was likely to be supported by other components of demand, such as net exports.”
Speaking of inflation, the BOE expects inflation to increase by 2.7% year-on-year in 2017. And while the readings for July missed the market’s expectations, the headline annual reading came in at 2.6%, which is in-line with the BOE’s own forecasts. Although headline inflation has eased since topping at 2.9% back in May.
Looking forward, things don’t look so bright for inflation since anecdotal evidence gathered by Markit showed that input costs have been increasing at a slower pace.
Moreover, real wages continue to take hits, which would likely be bad for consumer spending and inflation. And worth noting is that real wage growth continues to fall, even though labor market conditions continue to tighten.
Also worth noting is that the three-month average for nominal regular wage growth (bonuses are stripped and inflation not taken into account) is 2.1%, which is slower than the BOE’s staff forecast that it would come in at +2.2%. And remember, the BOE already downgraded this forecast, which further highlights the weakness in wage growth, even if inflation is not taken into account.
Finally, retail sales drastically slowed year-on-year in July, which is a poor start for Q3 GDP growth. On a more upbeat note, Markit’s manufacturing PMI report noted that there was “a significant boost from the trend in new export business, as foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010.” However, it remains to be seen if Markit’s anecdotal evidence would translate to “hard” data.