Since another BOE statement is coming up, I thought that now would be a good time for another economic roundup to give y’all a broad view on how the U.K. economy has been faring lately.
- The second estimate for Q2 2017 GDP growth was unchanged at 0.3% quarter-on-quarter.
- Even so, this is a faster rate of quarterly growth compared to Q1’s +0.2%.
- Since this is the second estimate, we now have the a GDP breakdown using the expenditure approach.
- And unfortunately, household spending only rose by 0.1%, which is weaker compared to the 0.4% increase printed in Q1.
- This is the weakest increase in household spending in 10 quarters.
- Morever, this marks the fourth consecutive quarter of ever weaker quarterly increases for household spening.
- Also, the increase in gross fixed capital formation was weaker in Q2 compared to Q1 (+0.7% vs. +1.0% previous).
- On a happier note, net trade had no contribution to GDP growth because the 0.7% increase in exports was offset by the negative contribution from the 0.7% increase in imports.
- This is only happier relative to Q1 since the 0.7% slide in exports back in Q1 is the reason why Q1 GDP growth is slower on a quarter-on-quarter basis.
- Year-on-year, Q2 GDP growth was also unchanged at +1.7% in Q2.
- This is a slower rate of expansion compared to Q2’s +2.0%.
- Morover, this is the slowest annual rate of expansion in four quarters.
- The slower annual growth in Q2 was due to weaker household spending (+2.0% vs. +2.6% previous), weaker exports (+2.4% vs. +2.9% previous), and stronger imports (+3.3% vs. +3.7% previous).
- Gross fixed capital formation continued to strengthen at an annual basis, though (+2.5% vs. +2.0% previous).
- This is the strongest increase in gross capital formation in six quarters and marks the second straight quarter of stronger increases.
- The number of claimants for unemployment-related benefits fell by 4.2K in June.
- This is a welcome development after four consecutive months of increases.
- The jobless rate, meanwhile, fell from 4.5% to 4.4% during the three months or June (Q2 essentially).
- This is a new record low since comparable records began in 1975.
- Even better, the jobless rate improved as the employment rate climbed higher from 74.9% to a new record high of 75.1%.
- Nominal wage growth, meanwhile surged by 2.8% year-on-year.
- This is the biggest increase in six months.
- However, the increase was due to the huge 17.2% increase in bonuses.
- If bonuses are stripped, then average weekly earnings only increased by 2.1%, which is weaker than the previous month’s 2.3% rise.
- Not only that, the three month average for nominal regular wage growth (less bonuses) only comes in at 2.1%.
- This is a tick slower compared to the BOE’s (already downgraded) forecast of +2.2%.
- In real terms (inflation is taken into account), average weekly earnings recovered by 0.5% after two month sof declines.
- However, the BOE is more focused on regular wage growth.
- And if bonuses are stripped, then wage growth continues to print negative numbers, coming in at -0.4%.
- This is the same rate of decline as in May and marks the fifth consecutive month of negative readings.
- 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 & Investments
- Total industrial production in the U.K. increased by 0.2% month-on-month in July.
- This is the slower than June’s +0.5% increase but marks the second month of growth at least.
- The slower reading was mainly due to declines in mining and quarrying output (-1.2% vs. +4.1% previous) and oil and gas extraction (-1.4% vs. +5.0% previous).
- These were offset mainly by the 0.5% increase in manufacturing production (+0.0% previous) and the 0.7% rebound in energy production (-0.9% previous).
- One thing worth noting is that the Q2 GDP report assumes a 0.4% quarter-on-quarter decline in total industrial production.
- However, revisions to the Q2 months mean that the decline in total industrial production was only 0.3%, which could lead to an upward revision to GPP growth.
- Year-on-year total industrial production rose by 0.4% in July, which is faster than the 0.3% increase in June.
- Hard slumps in mining and quarrying output, as well as oil and gas extraction, were also the main drags to the annual reading.
- However, the 1.9% surge in manufacturing output (+0.6% previous) was able to more than offset these.
- This is the strongest increase in manufacturing output in four months.
- Moving on to construction output, that fell by 0.9% month-on-month in July.
- This is the hardest drop in five months, marks the fourth consecutve month of declines, and is a bad start for Q3 to boot.
- The drop was largely due to the 3.9% slump in private housing (+5.1% previous).
- On a slightly more upbeat note, industrial building construction increase by 0.8% in July.
- This is a drastic slowdown compared to the +7.3% printed in June, but it does mark the third consecutive month of increases.
- Also, commercial building output rose by 0.3%, which is the first rise after three straight months of declines.
- Year-on-year, construction output fell by 0.4% (+0.9% previous).
- Private industrial construction was still the main drag, but it’s rate of decline continued to slow.
- The 12.7% drop in private industrial construction is the slowest annual decline in five months after bottoming out at -26.5% back in April of this year.
- Looking forward, Markit’s manufacturing PMI reading for August improved further from 55.3 to a four-month high of 56.9.
- Commentary from Market was also good overall since “Input price inflation accelerates for first time in seven months,” which is a good sign for inflation.
- Moreover, “The domestic market was the prime source of new contract wins, while the trend in new export business also remained robust,” which are goods news for consumer spending and exports respectively.
- Moving on, Markit’s construction PMI reading for August, that weakened from 51.9 to a 12-month low of 51.1.
- According to commentary from Markit the weaker reading was due to “civil engineering activity was close to stagnation and commercial work dropped at the fastest pace since July 2016.”
- As for, Markit’s services PMI reading for August, it eased slightly from 53.5 to an 11-month low of 53.8.
- However, commentary from Markit was actually kinda upbeat for inflation and jobs growth
- since “The rate of job creation accelerated for the third month running to its strongest since the start of 2016” while “Higher operating expenses placed pressure on firms to increase their average prices charged in August. The latest rise in service sector charges was the fastest since April.”
- Consumer confidence improved in August, recovering from a 12-month low of -12 to -10 index points.
- This puts an end to two straight month of ever poorer readings.
- Even so, consumer confidence has been in negative territory since April 2016.
- Despite really poor consumer confidence back in July, 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 slightly narrowed from £2.914 billion to £2.872 billion in July.
- This is a good start for Q3.
- However, exports fell by 0.17%, which marks the second straight month of falling exports.
- It just so happens that imports fell by a harder 0.24%, which is why the trade gap narrowed.
- On much more upbeat note, exports in June were bumped higher while imports were revised lower.
- As a result, the trade deficit between Q1 and Q2 became significantly narrower.
- To be more specific, the trade deficit in Q2 is 12.33% smaller compared to Q1.
- Originally, the trade gap was estimated to have widened by 1.19%.
- And the much smaller deficit was due to exports growing by 0.8% quarter-on-quarter and import growing by a much weaker 0.06%.
- The second estimate for Q2 GDP estimated that both grew at 0.7% apiece.
- This will likely mean a positive revision for Q2 GDP growth and a stronger positive contribution from net trade.
- Remember, as discussed earlier, net trade didn’t contribute to GDP growth since exports and imports cancelled each other out.
Putting it all together
The BOE downgraded its growth forecast for 2017 from 1.9% year-on-year to just 1.7% during the August BOE statement, partly because of the weak year-on-year growth in Q2, which is the weakest in four quarters.
And net trade was apparently a drag on the year-on-year reading, thanks to the weaker increase in export, which doesn’t really support the case of the BOE hawks that:
“Although consumer spending appeared to be softening, as expected, growth was likely to be supported by other components of demand, such as net exports.”
Things look a bit better quarter-on-quarter, though, since exports rose by 0.7% in Q2 after falling also by 0.7% back in Q1. Net trade didn’t contribute to quarterly GDP growth, however, because the 0.7% rise in imports effectively cancelled out the positive contribution from the recovery in exports.
However, the most recent trade data shows that exports rose by 0.8% in Q2 while imports rose by a much weaker 0.06%, so it’s highly likely that Q2 GDP will be revised higher to reflect a positive contribution from net trade.
Looking forward, things currently don’t look so good for year-on-year GDP growth since retail sales much was much slower in July while the growth in exports was weaker.
Quarter-on-quarter, however, things look a bit mixed since retail sales in July maintained the same pace of increase while the trade deficit narrowed, also in July. But on the other side of the table, it looks like gross fixed capital formation is on course to be a drag, given the month-on-month drop in construction output.
Moving on to inflation, the BOE expects inflation to increase by 2.7% year-on-year in 2017. And for the month of July, in particular, the BOE expects the headline annual reading to come in at 2.6%, which it did, so inflation is currently evolving as expected.
And if PMI reports are accurate, then it looks like companies are reporting higher input costs and passing them on, so inflation likely will continue to pick up.
However, real wages continue to take hits, even as the labor market continues to tighten, which would likely be bad for consumer spending and will likely dampen inflation down the road as well.