Greetings, forex friends! As Pip Diddy noted in his latest Top Forex Market Movers of the Week, the pound got clobbered due to a bunch of poor economic reports. And if that made you want to know how the U.K. economy is currently doing overall, 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 first estimate for Q4 2016 GDP printed a +0.6% quarter-on-quarter rate of growth.
- This is the same rate of expansion as the revised final readings for Q2 and Q3 2016.
- In addition, U.K. GDP has been growing on a quarterly basis for 16 consecutive quarters already.
- Year-on-year, Q4 2016 GDP grew by 2.2%, matching Q3’s annual rate of expansion.
- The readings for Q4 and Q3 are the shared highest since Q2 2015.
- Furthermore, annual GDP growth steadied after three consecutive quarters of accelerating growth.
- Again, this is the first or preliminary estimate, so only the output approach is used – breakdown using the expenditure is not yet available.
- Having said that, the service sector was the one and only driver for quarter-on-quarter growth.
- And among the services industries, the business and financial services industry accounted for half of quarterly GDP growth.
- Consumer spending was likely a major driver as well, since the retail and wholesale trade industry, hotels, and restaurants also contributed 0.2% to quarterly GDP growth.
- The remaining 0.1% came from government and other services.
- Industrial production had no positive contribution to GDP growth because the 0.7% increase in manufacturing output (-0.8% previous) and 3.9% increase in utilities production (-4.2% previous) were offset by the 6.9% slump in mining and quarrying output (+4.3% previous).
- For the year-on-year reading, the services sector was also the main driver.
- The business and financial services industry had a positive contribution of 1.0% to annual GDP growth.
- The retail and wholesale trade industry, hotels, and restaurants, were also a major driver for annual GDP growth, adding 0.8% to GDP growth.
- The number of claimants for unemployment-related benefits fell by 42.4K in January.
- This is the largest fall since October 2013 and marks the second month of decline to boot.
- Moving on, the jobless rate for the October-December period (Q4 essentially) held steady at 4.8%.
- This is the lowest reading since the July-September 2005 reporting period.
- Also, the jobless rate has been holding steady at this multi-year low for four consecutive reporting periods since the July-September period.
- The employment rate, meanwhile, ticked higher to 74.6%, which is a new record high.
- So far, so good. Wages were disappointing, though.
- Nominal average weekly earnings (bonuses included) grew by 1.9% year-on-year in
- December, with a three-month average of 2.6%.
- This is the weakest year-on-year increase since February 2016.
- In addition, the abrupt slowdown puts an end to three consecutive months of faster annual increases.
- The 5.5% drop in bonuses was the main reason for the slowdown, although regular wages also grew at a slower pace.
- If bonuses are stripped, then nominal average weekly earnings grew by 2.4% year-on-year in December, slower than November’s 2.7%.
- It’s also the weakest reading since August 2016.
- Those are disappointing enough, but they’re even more disappointing in real terms (taking inflation into account).
- Real average weekly earnings only increased by a measly 0.2% year-on-year, with a three-month average of 1.4%.
- This is way below 2016’s average increase of 1.9%.
- Moreover, December’s reading is the weakest increase since August 2014.
- If bonuses are stripped, real wages only grew by 0.7% in December, with a three-month average of 1.4%.
- This is the weakest year-on-year increase since October 2014.
- On a slightly upbeat note, the readings are still clinging to positive territory.
- Also, real wages have been in positive territory since September 2014.
- The sudden slowdown is a warning sign, though.
- Headline CPI fell by 0.5% month-on-month in January (+0.5% previous).
- This is the first monthly decline in six months and the sharpest drop in a year.
- Year-on-year, headline CPI increased by 1.8% (+1.6% previous).
- This is the best reading since June 2014.
- As for the core reading, it held steady at 1.6%, which is the best reading since August 2014.
- The drop in the monthly reading was due to the decline in 6 out of 12 components.
- The main drags were the 4.2% slump in the price of clothing and footwear (-1.0% previous), the 2.5% drop in the cost of furniture and household equipment (+0.2% previous), the 0.6% tumble in transportation costs (+2.9% previous), the 0.7% slide in the cost of recreation and culture (-0.1% previous), and the 0.2% fall in prices at restaurant and hotels (+0.1% previous).
- As for the higher year-on-year reading, that was primarily due to the 5.7% surge in transportation costs (+3.7% previous) and the 0.5% fall in the price of food and non-alcoholic beverages, which is a softer fall compared to December’s 1.1% drop.
- And the higher cost of transportation was due primarily to the 3.4% surge in motor fuels.
- The other components only had minimal changes or their weights were too small to have a significant impact.
- Incidentally, the transportation and food and non-alcoholic beverages components are not part of the core reading, which is why the core reading held steady at 1.6%.
Business Conditions & Sentiment
- Total industrial production in the U.K. jumped by 1.1% month-on-month in December.
- And the jump was due solely to the 2.1% surge in manufacturing output, since the other components were drags.
- Year-on-year this translates to a 4.3% surge in total industrial output (+2.2% previous).
- This is the fastest increase since January 2011.
- The annual jump in industrial output was also due to higher manufacturing output, which surged by 4.0%, the biggest increase since April 2015.
- For Q4, total industrial production rose by 0.3% over Q3.
- This will likely give the second estimate for Q4 GDP a lift, since industrial production was flat and had no positive contribution in the first estimate.
- Looking forward, Markit’s manufacturing PMI reading for January eased from a 32-month high of 56.1 to 55.9.
- On an upbeat note, January’s reading is still the second best reading in 32 months.
- According to commentary from Markit, the lower reading was because “growth in new business moderated following the prior month’s high.“
- Moving on, Markit’s construction PMI reading for January dropped from 54.2 to a five-month low of 52.2.
- Construction activity in all three sub-sectors (housing, commercial, and civil engineering) weakened.
- However, the main drag came from housing construction, since “the latest expansion was the weakest for five months.”
- Aside from weaker construction activity, new work orders also moderated, with the rise in new work orders being “the least marked since October 2016.”
- Finally, Markit’s services PMI reading for January slide lower from 56.2 to 54.5, a three-month low.
- The weaker reading was due to employment rising at the slowest pace in five months, new businesses easing from December’s one-year high, and the slowest rise in output since October.
Consumer Spending & Sentiment
- The number of mortgage approved for home purchases in December came in at 67.9K.
- This is slightly more than the previous month’s 67.5K figure.
- Also, the current reading keeps the uptrend steady, which implies that the U.K. housing market is still relatively stable.
- Net lending to individuals, meanwhile, increased by £4.8 billion in December, which is less than the £5.1 that was printed during the previous month.
- Moreover, this is the smallest increase since May 2015 and puts an end to five months of improving readings.
- This means that consumer credit weakened in December and could mean that consumer spending would also weaken.
- As it turns out consumer spending did weaken, since retail sales volume fell by 0.3% month-on-month in January after printing a 2.1% drop in December.
- This marks the third month of monthly declines.
- In addition, December’s reading was revised lower from -1.9% to -2.1%, which is the hardest drop since May 2011.
- Year-on-year, retail sales volume still increased.
- However, the 1.5% increase in January is the slowest annual increase since November 2013.
- As for consumer confidence, it improved from -7 to -5, which means that Britons are still quite pessimistic.
- Moreover, consumer confidence has been in negative territory since April 2016.
- The U.K.’s trade deficit narrowed from £3.559 billion to £3.394 billion in December.
- The narrower trade deficit was due to exports jumping by 2.2% to a new record high of £48,822 billion.
- The £1.1 billion increase in goods exports to non-EU countries, in particular, was the a major contributor for the higher export levels.
- Imports, meanwhile, rose by 1.89% to £52,216 billion, which is a new record high.
- Another good news is that the total deficit for Q4 is £8.579, which is much narrower than Q3’s £14.143.
Putting it all together
Overall, the British economy has been doing okay, with stable GDP growth on both an annual and quarterly basis. Heck, annual GDP growth of 2.2% is even in line with the BOE’s forecast, as presented in the February inflation report. However, the details are presenting a mixed picture.
On the one hand, trade, exports in particular, showed improvements and industrial production has surged due to rising manufacturing output. And these are very likely because of the pound’s recent weakness, which has made British goods relatively cheaper and more competitive.
On the other hand, the weaker pound has made imported stuff relatively more expensive, which has caused prices to steadily go up, so consumer spending has been taking hits recently. And Q1 2017 is off to a rather poor start, as shown by January’s retail sales report. Also, things could get worse because real wage growth saw a drastic slowdown and individual credit has began to shrink.
To add to that, the available economic reports support the BOE’s forecasts and assumptions, namely that the main drivers for the recent (and future) increase in inflation are the unwinding of drags from the past falls in energy prices (namely oil) and the pound’s weakness, which has caused tradables inflation to rise, rather than inflation from strong domestic demand. And also according to the BOE, higher tradables inflation due to the weaker pound, would fade away in a few years, with signs of easing inflationary being expected in 2018.
As such, the current available reports don’t really provide any justification for hiking rates or switching to a hiking bias, thereby reinforcing the BOE’s decision to maintain its neutral monetary policy bias and dampening rate hike expectations in the process.