As Pip Diddy noted in his latest weekly recap, the pound got its behind kicked really hard last week, thanks to returning Brexit-related jitters, although the downgrade to the U.K.’s Q1 GDP also apparently helped to push the pound lower. And if that made you wonder how the U.K.’s economy has been doing overall recently, then today’s Economic Snapshot will help you out.
Note: As with all Economic 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 second estimate for Q1 2017 GDP growth came in at 0.2% quarter-on-quarter.
- This is a downgrade from the first estimate of +0.3% and is much slower than Q4 2016’s +0.7%.
- In addition, this is the slowest rate of quarterly expansion in four quarters.
- On a more upbeat note, U.K. GDP has been growing on a quarterly basis for 17 consecutive quarters already.
- The downgraded reading was due mainly to out from the services sector being smaller than originally estimated.
- The downward revision was broad-based in the service sector, although the business services and finance industry saw the biggest downward revision.
- Using the expenditure approach, household spending only increased by +0.3% (+0.7% back in Q4).
- As a result, consumer spending only added 0.2% to total GDP growth (+0.4% back in Q4).
- However, the biggest drag to GDP growth was net trade since it subtracted 1.4% from total quarterly GDP growth after adding 1.7% back in Q4.
- On a more optimistic note, gross fixed capital formation rebounded by +1.2% in Q1 (+0.1% previous), adding about 1.2% to GDP growth and partially offsetting the drag from trade.
- Government spending, meanwhile, added about 0.1% to GDP growth after having negligible contribution in Q4.
- Year-on-year, GDP grew by 2.0%, a tick lower than the fist estimate of 2.1% but faster than Q4 2016’s +1.9% at least.
- Also, the annual reading for Q1 2017 is the shared highest (with Q3 2016) since Q2 2015.
- The number of claimants for unemployment-related increased by 19.4K in April, which is smaller than the previous month’s 33.5K increase.
- Meanwhile, the jobless rate for the January-March period (Q1 essentially) ticked lower from 4.7% to 4.6%.
- This is the good enough, but it gets even better because this is the lowest reading since 1975.
- Better still, the lower jobless rate appears to be healthy because the employment rate rose from 74.6% to a record high of 74.8%.
- As for wage growth, nominal average weekly earnings (bonuses included) grew by 2.4% year-on-year in March, with a three-month average of 2.4%.
- This is slower than February’s +2.9%.
- However, the weaker wage growth was due to the smaller increase in bonuses (+3.9% in March vs. +12.4% in February)
- If bonuses are stripped, then wages grew by 2.1%, which is faster than February’s 1.9%.
- Also, the faster increase in March puts an end to three consecutive months of ever slower wage growth.
- Even so, wage growth is beginning to fall behind inflation.
- In real terms (inflation is taken into account), average weekly earnings fell by 0.1%.
- This is the first contraction in wage growth since August 2014.
- If bonuses are stripped then real average earnings fell even harder (-0.5%).
- This marks the second month of declines after the 0.4% contraction reported in February.
- Also, this is the hardest fall since July 2014.
- Headline CPI fell increased by 0.5% month-on-month between March and April (+0.4% previous).
- This marks the third month of monthly increases after the 0.5% fall in January 2017.
- Year-on-year, headline CPI increased by 2.7% (+2.3% previous).
- This is the best reading since September 2013.
- However, it meets the BOE’s staff forecast so the reading is not really that special.
- The monthly CPI increase was broad-based, with increases reported in 8 out of 12 components.
- And among these components, the biggest driver was the 1.6% increase in transport costs, followed by the 0.4% rise in the prices charged by restaurants and hotels.
- As for the year-on-year reading, that was primarily due to the 6.4% surge in transportation costs (+4.7% previous) and the 2.4% jump in the price of clothing and footwear (+0.9% previous).
- And the higher cost of transportation was due primarily to airfare costs soaring by 6.8% after plunging hard by 22.8% previously.
- The transportation components is stripped from the core reading.
- Even so, all other CPI components printed increases which is why the core reading climbed higher from 1.8% to 2.4%.
- This is the best core reading since March 2013.
Business Conditions & Sentiment
- Total industrial production in the U.K. fell by 0.5% month-on-month in March.
- This marks the third consecutive months of declines and means that industrial output fell in Q1 2017.
- Also, this is one of the reasons why GDP slowed in Q1.
- Year-on-year this translates to a 1.4% increase in total industrial output (+2.5% previous).
- This is the weakest annual reading in five months and marks the third consecutive month of ever weaker readings.
- The weaker annual reading for industrial output was partially due to manufacturing output increasing only by 2.3%.
- This is the weakest annual increase in manufacturing output since November 2016.
- Looking forward, Markit’s manufacturing PMI reading for April jumped from 54.2 to a three-year high of 57.3.
- According to commentary from Markit, the manufacturing sector saw the “strongest inflows of new work since January 2014.”
- In addition, “There were also reports of a solid increase in new export business, reflecting a combination of stronger global market conditions and the historically weak sterling exchange rate.”
- And it looks like the U.K. is expanding its horizons because foreign demand came mainly from “clients in North America, Europe, Africa and Brazil.”
- Moving on, Markit’s construction PMI reading for April improved from 52.2 to a four-month high of 53.1.
- According to the PMI report, construction activity in all three sub-sectors (housing, commercial, and civil engineering) increased.
- However, “Civil engineering was the best performing sub-category of construction activity in April, with the rate of expansion the fastest since March 2016.”
- As for, Markit’s services PMI reading for April, it improved from 55.0 to a four-month high of 55.8, defying expectations that it would deteriorate to 54.6.
- According to Markit, “new business growth gained further momentum, with the pace of expansion the strongest so far this year and the second-fastest since the summer of 2015.”
- The number of mortgages approved for home purchases in March came in at 66.84K, which is less than the 67.93K reported in February.
- This marks the second month of slightly weaker readings, which implies that the U.K. housing market may be beginning to cool off.
- Meanwhile, net lending to individuals increased by £4.7 billion in March.
- This is less than the £4.9 that was printed during the previous month.
- Moreover, this is the smallest increase since September 2016.
- This means that consumer credit weakened and as it turns out, consumer spending did weaken in March since retail sales volume fell by 1.4% month-on-month.
- However, retail sales rebounded by 2.3% in April, thanks to the 1.3% increase in retail sales volume reported by food stores (-0.4% previous), as well as the 2.3% increase in retail sales volume from non-foo stores (-0.7% previous).
- This is the biggest monthly increase since January 2016.
- Year-on-year, retail sales volume increased by 4.0%, which is the best reading in five months.
- Despite the rebound in retail sales, consumer confidence actually deteriorated further in April, falling from -6 to -7 index points.
- Consumer confidence has been in negative territory since April 2016.
- The U.K.’s trade deficit widened from £2.65 billion to £4.90 billion in March.
- The wider trade deficit was due to the 1.3% increase in exports being overwhelmed by the 5.64% surge in imports.
- Quarter-on-quarter, the U.K.’s trade deficit widened by by £5.7 billion to £10.5 billion.
- And as noted in the GDP breakdown earlier, net trade was the biggest drag to GDP growth in Q1.
Putting it all together
The year-on-year reading for CPI came in at 2.3% by the end of Q1, beating the BOE’s forecast of 2.0%. The jobless rate, meanwhile, came in at 4.6%, which is also better than the BOE’s 4.9% forecast and is the best reading since 1975 to boot.
However, GDP growth only came in at 1.9% year-on-year, missing the BOE’s forecast of 2.0%.
Looking at the most recent data, CPI increased by 2.7% year-on-year. While this may seem impressive, it’s actually within the BOE’s forecast, so it’s not likely to entice more BOE officials to join the hawkish camp.
As for GDP, the BOE expects GDP to grow by 1.9% in 2017. But for Q1 2017 specifically, the BOE forecasted a quarter-on-quarter rate of expansion of 0.3%. Unfortunately, GDP growth was downgraded to 0.2% during the second estimate. Worse, the major drag happened to be net trade.
As such, Kristin Forbes’ justification for voting for a rate hike doesn’t seem as solid anymore. And for reference, Forbes explained her rationale for being a hawk as follows (emphasis mine):
“Although consumer spending appeared to be softening, as expected, growth was likely to be supported by other components of demand, such as net exports.”
Growth slowed and trade happened to be the major drag because exports fell and imports surged. Meanwhile, inflation continues to strengthen, causing real wages to finally dip to negative territory for the first time since August 2014. Also, personal credit and mortgage approvals have been falling, which could be signs of further weakness in consumer spending and possibly the housing market.
If these recent developments continue, then it looks like the BOE may end up being trapped between a rock and a hard place. Cutting rates may help stoke growth but it will likely result in an inflation overshoot. But if the BOE decides to hike rates to keep inflation in check, it may end up throttling growth some more.
Anyhow, things aren’t yet so dire and there’s still some glimmer of hope. Retail sales, for one, rebounded in April. Another is that the PMI readings remain elevated. More importantly, the manufacturing sector reported an increase in foreign demand in April. But will this translate to higher exports and a narrower deficit in April? Well, we’ll find out soon enough.
And while CPI has been surging, with most components printing an increase, one of the major contributors happen to be the transport sector, which is tied to higher fuel costs. And since oil steadied and even tumbled recently, that may soon translate to weaker or steadier CPI, which may allow real wages to potentially recover.