As I mentioned in an earlier write-up, the BOE will be announcing its last monetary policy statement of the year tomorrow.
And if that made you wonder how the U.K.’s economy is doing lately, then today’s economic snapshot is just for you.
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 Q3 2016 GDP growth was unchanged at +0.5% quarter-on-quarter.
- Growth in Q3 is slower than Q2’s final reading of +0.7%.
- There are no clear trends for the quarter-on-quarter reading, but U.K. GDP has been growing on a quarterly basis for 15 consecutive quarters already.
- Year-on-year, Q3 2016 GDP grew by 2.3%.
- This is faster than Q2’s downwardly revised reading of 2.1%.
- Not only that, annual GDP has been improving for three consecutive quarters after reaching a low of +1.7% back in Q4 2016.
- Moreover, Q3’s rate of expansion is the fastest in five quarters.
- Using the expenditure approach, the main reason for the slower quarter-on-quarter growth was the 0.7% increase in household spending, since it’s slower than Q2’s 0.9%.
- In addition, investments also increased at a slower rate, with gross fixed capital formation only increasing by 1.1% in Q3 versus Q4’s +1.6%.
- This was partially offset by the weaker drag from net trade, thanks to the 0.7% increase in exports and the 1.5% fall in imports.
- Year-on-year, household spending was also weaker (2.6% vs. 3.0% previous).
- However, investment increased at a faster pace (1.2% vs. 1.0% previous).
- Net trade was also a major contributor to the faster year-on-year increase, thanks to a faster increase in exports (4.1% vs. 3.1% previous) and a slower increase in imports (2.6% vs. 4.7% previous).
- According to commentary from the GDP report, “The reporting period for this release covers Quarter 3 2016, and therefore includes data for the whole period after the EU referendum. Since a result, growth in the gross domestic product (GDP) has been in line with recent trends. This suggests limited effect so far from the referendum.”
- The number of claimants for unemployment-related benefits increased by 2.4K in November, which is fewer than October upwardly revised 13.3K reading (originally 9.8K).
- This is also less than the expected 6.2K increase.
- Still, the number of claimants has been increasing for four months running now.
- On an even more upbeat note, the jobless rate for the August-October period held steady at 4.8%.
- This is the lowest reading since the July-September 2005 reporting period.
- The employment rate, meanwhile, held steady at the all-time high of 74.5% for the fourth consecutive month.
- As for wages, nominal average weekly earnings (bonuses included) grew by 2.8% year-on-year in October, with a three-month average of 2.5%.
- Nominal average weekly earnings have been increasing for two straight months now.
- October’s rise was due to a 7.1% jump in bonuses, however.
- If bonuses are stripped, then nominal average weekly earnings grew by 2.6% year-on-year in October, slower than September 2.7%.
- Still, the 2.7% increase is the second-fastest increase in 14 months.
- In real terms (taking inflation into account), average weekly earnings increased by 1.9%, with a three-month average of 1.7%.
- Real average weekly earnings have been picking for two months in a row after slowing to 1.5% back in August.
- If bonuses are stripped, however, real wages only grew by 1.6% in October, a tick lower than September’s 1.7%.
- Real wages have been in positive territory since September 2014, so there has been actual growth in purchasing power.
- Headline CPI rose by 0.2% month-on-month in November (+0.1% previous).
- The uptick puts an end to two consecutive months of weaker increases after peaking at 0.3% back in August.
- Year-on-year, headline CPI increased by 1.2% in November (+0.9% previous).
- This is the best reading since October 2014.
- As for the core reading, it recovered from a five-month low of 1.2% to 1.4%.
- The uptick in the monthly reading was due mainly to the rebound in the price of food and non-alcoholic beverages (+0.4% vs. -0.5% previous) and the faster increase in clothing and footwear (+1.4% vs. +0.3% previous).
- As for the higher year-on-year reading, that was primarily due to higher costs of furniture (+0.8% vs. +0.1% previous) and recreation and culture (+0.7% vs. +0.2% previous), as well as an increase in the price of clothing and footwear (+0.9% vs. -0.7% previous).
- Incidentally, the above-mentioned drivers were also the main reasons why the core CPI reading improved.
Business Conditions & Sentiment
- Total industrial production in the U.K. fell by 1.1% year-on-year in October.
- The consensus was that it would improve from 0.4% to 0.5%.
- More importantly, October’s reading is the first negative reading in 10 months and is the worst reading since September 2013.
- The main reason for the negative reading was the 8.7% slump in mining and quarrying output, which subtracted 1.15% from the total industrial output.
- The 0.4% tumble in manufacturing output was also a drag, subtracting 0.30% from the total industrial output.
- This is the first contraction in manufacturing output in 6 months.
- The slide was pretty broad-based, too, with 8 of the 13 manufacturing sub-sectors reporting declines in output.
- Looking forward, Markit’s manufacturing PMI reading for November tumbled further from 54.2 to 53.4.
- According to commentary from Markit, the lower reading was due to the slowdown in both production and new orders growth.
- Specifically, “the trend in new orders for investment goods such as plant and machinery has eased sharply.”
- In addition, survey respondents noted that “The effects of the weak sterling exchange rate continued to be felt by manufacturers during November.”
- Moving on, Markit’s construction PMI beat expectations by climbing higher from 52.6 to 52.8 (slide to 52.2 expected).
- The November reading is a seven-month high.
- Commentary from the PMI report noted that the stronger reading was due to “Business activity and incoming new work [increasing] at the strongest pace since March.”
- Not only that, commercial building activity even picked up “for the first time in six months.”
- On a less upbeat note, there was “a steep and accelerated rise in … cost burdens,” thanks to the pound’s recent weakness.
- As for Markit’s services PMI, it also beat expectations by jumping from 54.5 to 55.2 (slide to 54.0 expected).
- November’s services PMI reading is a 10-month high.
- The jump was thanks to new businesses growing “for the fourth successive month, and at the second-fastest rate since January.”
- However, business sentiment fell to its lowest reading since July because of ongoing uncertainty “linked to Brexit, the value of sterling and the unexpected result of the US presidential election.”
- Net lending to individuals in October increased by £4.9 billion, which is more than the £4.9 billion increase during the previous month.
- In addition, this is better than the average monthly increase of £4.2 billion over the previous six months.
- The number of mortgages approved for home purchases, meanwhile, came in at 67.52K.
- This is higher than the previous month’s upwardly revised 63.59K, as well as the six-month average of 63.91K.
- Moving on, consumer confidence for November dropped further from -3 to -8, which means that Britons became even more pessimistic.
- Consumer confidence has been in negative territory since April 2016.
- Despite the persistent pessimism, retail sales volume surged by 1.9% month-on-month in October.
- This is substantially better than the expected 0.5% increase.
- Also, this is the biggest month-on-month increase in three months.
- Things look even better year-on-year, with retail sales jumping by 7.4%.
- This is way better than the consensus reading of +5.3%.
- Moreover, this is the biggest year-on-year jump since April 2002.
- The details of the retail sales report also showed that the increase was broad-based, with all retail store types reporting increases, excepting department stores.
- The U.K.’s trade deficit narrowed from £5.812 billion to £1.971 billion in October.
- This is the smallest trade gap in five months and is a good start for Q4.
- Also, the smaller trade gap puts an end to two consecutive months of ever bigger deficits.
- The narrower trade deficit was due to exports surging by 4.57% to a record high of £46,412 billion while imports fell by 3.61% to £48,383 billion after reaching a record high of £50,194 billion.
- The surge in exports was mainly due to exports to countries outside the E.U. soaring by 15.7% to a record high of £14.4 billion.
- Although exports to E.U. countries increasing by 1.5% increase to £12.4 billion also helped.
Putting it all together
Overall, the British economy seems to be doing okay for now, since growth is still relatively strong on both an annual and quarterly basis.
Q4 looks somewhat mixed, though. On the one hand, retail sales surged in October while the trade deficit narrowed by a lot, thanks to soaring exports to non-E.U. countries. But on the other hand, industrial output plummeted and Markit’s manufacturing PMI reading continues to ease.
Still, the labor market continues to exceed the BOE’s own projections. For reference, the November Inflation Report projects that the jobless rate would be at 4.9% by the end of the year.
But the reading for the August-October period held steady at 4.8%, which is the lowest reading since the July-September 2005 period. As for inflation, it accelerated to 1.2% year-on-year, which is just below the BOE’s projection that annual inflation would be at 1.3% by the end of 2016.
This possibility of a faster rise in inflation, in particular, is one of the major reasons why the BOE flipped from an easing bias to a more neutral policy bias during the November BOE Statement.
This neutral bias was further reinforced during BOE Guv’nah Mark Carney’s November 15 testimony when he said that (emphasis mine):
“What we have now is a neutral bias so we’ve got to a position where we think the stance, the unanimous view of members of the MPC is that the stance on monetary policy is appropriate, we’re still in a position of uncertainty there’s reasons why the economy could turn out stronger, inflation higher or the opposite, there’s risks on both sides so rates could go up they could go down – so it’s a neutral bias, we’re about as explicit as that.”