Greetings, forex friends! The MPC policy rate decision and statement is coming up tomorrow (May 12, 11:00 am GMT), so I thought I’d give y’all a snapshot of how the United Kingdom’s economy is doing recently.
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 preliminary estimate for Q1 2016 GDP growth came in at 0.4% quarter-on-quarter, which is a slower rate of expansion when compared to Q4 2015’s 0.6%.
- There are no clear trends, but GDP has been growing for 13 consecutive quarters now.
- Year-on-year, Q1 2016 GDP grew by 2.1%, which is the same pace as that of Q4 2015 and also breaks three consecutive quarters of slowing growth.
- Trend-wise, annual GDP has been growing at a slower pace, with the most recent peak at 3.0% back in Q2 2014.
- Again, this is the preliminary estimate, so only the output approach is used.
- In terms of output, the service sector was still the main powerhouse, but it only grew by 0.6% quarter-on-quarter (+0.8% previous), thereby adding only 0.5% to GDP growth (+0.7% contribution previously)
- Agriculture contracted by 0.1%, but had a negligible contribution
- The construction industry contracted by 0.9% (+0.3% previous), thereby subtracting 0.05% from quarter-on-quarter GDP growth
- Total production fell by 0.4%, which subtracted 0.05% from quarter-on-quarter GDP growth (-0.1% contribution previous).
- The number of claimants for unemployment-related benefits increased by 6.7K in March
- This is the first increase in four months.
- The jobless rate during the three months to February held steady at 5.1% for the fourth consecutive reporting period.
- The current jobless rate is apparently the lowest reading in almost ten years.
- If bonuses are included, nominal average weekly earnings grew by 1.1% year-on-year in February, with a three-month average of 1.8%.
- This is lower than the previous month’s 2.6% increase
- If bonuses are stripped, nominal average weekly earnings grew by 2.3% year-on-year in February, with a three-month average of 2.2%.
- No clear trends for nominal wages, but real wages (adjusted to take inflation into account) have been in positive territory since early 2014, so there has been growth in purchasing power.
- Real average weekly earnings grew by 0.8%, which is way slower than the previous 2.5% increase
- If bonuses are stripped, real wages grew by 2.1%, which is a bit faster than the previous month’s 2.0% increase
- Bonuses paid decreased in February (quite obviously), which is why total wages (in both nominal and real terms) saw a substantially slower increase.
- Headline CPI increased by 0.4% month-on-month in March, which is the second straight month that CPI has been improving on a monthly basis and is the highest reading in 19 months to boot.
- Year-on-year, headline March CPI climbed to a 15-month high of 0.5%.
- As for the core reading, it also accelerated to a 17-month high of 1.5%.
- The biggest drag to the annual headline reading was the 2.7% fall (-2.3% previous) in the price of food and non-alcoholic beverages.
- The transport component, which includes fuel, was actually less of a drag on a year-on-year basis since it only fell by 0.1% (-1.1% previous).
- The main drivers, meanwhile, were the increase in the cost of housing and utilities (0.4% vs. 0.3% previous), more expensive restaurants and hotels (2.1% v.s 1.9% previous), and clothing and footwear (1.4% vs. 0.3% previous).
- As for the increase in the monthly reading, that was mainly due to the 1% increase (1.3% previous) in the price of clothing and footwear, as well as the 1.7% increase in transport costs due to a 22% jump in the cost of airfares, thanks to the Easter season.
- The main drag still came from the fall in the cost of food and non-alcoholic beverages (-0.6% vs. -0.2% previous).
Business Conditions & Sentiment
- Markit’s manufacturing PMI reading for April dropped below the 50.0 stagnation level for the first time since April 2013.
- The current reading of 49.2 is the lowest since February 2013.
- Commentary from the manufacturing PMI report noted that the consumer goods and investment goods sectors saw the largest deterioration due to “softer growth of domestic demand and a reduction in new business from overseas.”
- Markit’s construction PMI for April came in at 52.0, which is the weakest reading since June 2013.
- The stagnation in new businesses was being cited as the main reason for the weak reading, with residential construction growth only rebounding marginally from March’s 38-month low and growth in commercial construction at its lowest since July 2013.
- Markit’s services PMI reading for April offered no salvation since it tumbled lower for the third consecutive month to a 38-month low of 52.3.
- There was a silver lining, however, since the introduction of the national living wage pushed input costs to a 27-month high, which will hopefully apply inflationary pressure and boost consumer spending and sentiment as well.
- However, Markit Chief Economist Chris Williamson’s comment on the three PMI reports was very downbeat since he said that “The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or through non-standard measures such as QE.”
- Total industrial production in the United Kingdom fell by 0.2% year-on-year in February.
- The largest negative contributor to the drop in industrial production was the 1.9% slump in manufacturing production, which is the largest ever since July 2013.
- Manufacturing production has been contracting for ten consecutive months now, with 12 of the 13 manufacturing sectors reporting declines in output.
Consumer Sentiment & Spending
- Retail sales volume during the March period contracted for the second consecutive month, dropping by 1.3% month-on-month after a previous 0.5% slide.
- Year on year, retail sales volume grew by 2.7% in March, which is slower than the previous month’s 3.6%.
- The year-on-year reading has been in positive territory for 35 consecutive months now, but it has also been increasing at a slower pace for the second month running.
- The amount spent by consumers in the retail trade industry decreased by 0.1% year-on-year and 1.3% month-on-month.
- However, average store prices fell for the 21st straight month, this time by 3.0% year-on-year (-2.5% previous), which is not gonna be good for CPI over time.
- The GfK consumer sentiment index was finally pushed into negative territory in April after holding out at zero for two months.
- This is the first negative reading in 15 months and means that Britons are now a bit pessimistic overall.
- The Savings Index climbed higher by 7 points to 5.0, which means that Britons are more inclined to save, which will likely hurt consumer spending down the road.
- The GfK attributes this concern over the general economy to jitters because of the looming Brexit referendum.
- The United Kingdom’s trade deficit narrowed for the second straight month in March, coming in at £3.83 billion (deficit of £4.30 billion previous).
- This was due to exports rising by 1.24% (+0.8% previous) to a six-month high of £42.6 billion while imports only nudged 0.11% higher to £46.43 billion.
- On a quarterly basis, the total trade deficit in Q1 2016 of £13.27 billion is the largest in eight years.
Putting it all together
CPI readings are still subdued but they’re all at their highest levels in over a year, so that’s good news for BOE officials.
And while the preliminary reading for Q1 GDP was okay, there’s a good chance that it will be downgraded now that other economic reports have surfaced, namely the total trade deficit in Q1 2016, which is the largest in 8 years.
And Q2 looks like it’s starting off on a weak footing since the April PMI readings for the construction, service, and manufacturing industries were all at multi-year lows, not to mention the possibility of a Brexit in June.
The BOE will likely address these in tomorrow’s MPC rate decision and statement, and some market watchers are even saying that BOE officials may even discuss the possibility of a rate cut as a preemptive measure to support growth.
And for reference, BOE officials were still inclined to hike rates during the previous MPC meeting.