Greetings, forex friends! The pound’s price action has been dictated mostly by Brexit-related polls and events lately, but if you’re wondering how the U.K. economy is doing overall as we head into crunch time for the Brexit referendum, then this Forex 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. However, the bullet points provided highlight the underlying details and trends that give the numbers their proper context.
- The second estimate for Q1 2016 GDP growth was unrevised 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 2.0%, which is a downtick from Q4 2015’s 2.1% expansion.
- This marks the fifth consecutive quarter of ever slowing annual GDP growth.
- Also, annual GDP has been growing at a slower pace, with the most recent peak at 3.0% back in Q2 2014.
- GDP growth for all of 2015 was 2.3%, which is a bit slower than 2014’s 2.9%, but is still the second-strongest post-recession growth on record.
- In terms of expenditure, consumer spending was the main driver for Q1 GDP, contributing 0.4% to quarter-on-quarter growth (+0.4% back in Q4 2015).
- Gross domestic investment was also a major contributor, adding 0.3% to quarterly GDP growth (+0.3% back in Q4 2015).
- The main drag came mainly from net trade, which subtracted 0.4% from quarter-on-quarter growth (-0.3% back in Q4 2015).
- The negative contribution from trade was due to a 0.3% contraction in exports (+0.1% previous) and another increase in imports (+0.8% vs. +0.9% previous).
- The number of claimants for unemployment-related benefits shrank by 0.4K in May.
- This is the first decrease since the number of claimants increased by 14.7K back in March.
- The jobless rate during the three months to April ticked lower to 5.0%, which is the lowest reading since October 2005.
- If bonuses are included, nominal average weekly earnings grew by 2.5% year-on-year in April, with a three-month average of 2.0%.
- Annual nominal wages have been increasing at a faster rate for the second consecutive month.
- If bonuses are stripped, nominal average weekly earnings grew by 2.5% year-on-year in April, with a three-month average of 2.3%.
- Real average weekly earnings (adjusted to take inflation into account) grew by 2.4% year-on-year, marking the second consecutive month that wages grew at a faster pace.
- If bonuses are stripped, real wages grew by 2.3%, which is the fastest pace of increase since September 2015.
- Real wages have been in positive territory since September 2014, so there has been actual growth in purchasing power.
- Headline CPI increased by 0.2% month-on-month in May after dipping to 0.1% in April from March’s 19-month high of 0.4%.
- Year-on-year, headline CPI held steady at 0.3% after falling from March’s 15-month high of 0.5%.
- Likewise, the core reading held steady at 1.2% after sliding from March’s 17-month high of 1.5%.
- The biggest drag to the annual headline reading was the 2.8% decrease (-2.5% previous) in the price of food and non-alcoholic beverages, which subtracted 0.3% from the CPI reading (-0.2% previous).
- The transport component, which includes fuel, was actually less of a drag on a year-on-year basis since it only subtracted 0.15% from the headline reading (-0.23% previous)
- The main drivers were education, which added 0.12% to CPI (+0.22% previous), and more expensive restaurants and hotels, which had a positive contribution of 0.32% (+0.23% previous).
- As for the suppressed monthly reading, that was mainly due to the 0.2% decrease in the price of clothing and footwear, as well as the 0.4% fall in the price of food and non-alcoholic beverages.
Business Conditions & Sentiment
- Total industrial production in the U.K. surged by 1.6% year-on-year in April, beating expectations that it will continue to contract.
- This is the fastest expansion since October 2015, and also broke two straight months of worsening readings.
- The main contributor (surprisingly enough) was the manufacturing sector, thanks to a 0.8% jump in manufacturing output.
- This is the first positive reading after 10 consecutive months of contractions.
- Looking forward, Markit’s manufacturing PMI reading for May managed to climb back above the 50.0 stagnation level to come in at 50.1.
- Commentary from the manufacturing PMI report noted that the domestic market was the main source for demand since orders from abroad “fell for the fifth consecutive month.”
- Markit’s May construction PMI continued to worsen, coming in at 51.2 (52.0 previous), which is the weakest reading in almost three years.
- The weak reading was blamed on incoming new businesses, which saw the first decline since April 2013.
- Civil engineering projects also stagnated while commercial construction activity grew at the slowest rate in nearly three years. Even residential construction activity “increased at one of the weakest rates seen since early-2013.”
- The fall in new work was attributed to clients holding off on additional construction work due to concerns over the upcoming Brexit referendum.
- As for Markit’s May services PMI reading, it rebounded to 53.5 after falling to a 38-month low of 52.3 previously.
- All’s not well, however, since new businesses expanded at the slowest pace in 41 months, and that was attributed once again to jitters ahead of the Brexit referendum.
- Markit Chief Economist Chris Williamson concluded that the combined PMI reports pointed to a 0.2% quarter-on-quarter growth in Q2.
- Net lending to individuals in April came in at £1.6 billion, which is the lowest reading since October 2013.
- Meanwhile, the number of mortgages approved for home purchases only came in at 66.25K, down from 70.31K, and the lowest reading since May 2015.
- The weak lending in April showed up as weak consumer spending in May, since retail sales volume for the month of May increased by 0.9% month-on-month, which is slower than the 1.9% increase that was posted during the previous month.
- Year-on-year, retail sales volume grew by 6.0% in May, which is a faster increase than April’s 5.2% increase, however.
- Annual retail sales have been increasing at a faster pace for the second straight month now.
- The amount spent by consumers in the retail trade industry increased by 3.1% year-on-year and 1.3% month-on-month.
- However, average store prices fell for the 23rd straight month, this time by 2.8% year-on-year (-2.8% previous), which is not gonna be good for annual CPI over time.
- The decline in store prices was broad-based, with all store types reporting decreases.
- The United Kingdom’s trade deficit narrowed for the third month running in April, coming in at £3.294 billion from £3.532 billion.
- This is the smallest trade deficit since September 2015.
- The narrower trade deficit was due to exports soaring by 5.31% (+1.85% previous) to a 31-month high of £44.945 billion.
- The 5.31% increase in exports is the fastest pace of increase since February 2010.
This also marks the third consecutive month that exports have been growing at a faster pace.
- Imports, meanwhile, jumped by 4.39% to a 16-month high of £48.238 billion, breaking two months of decreases.
- The jump in imports was mostly because of an increase in imported capital goods, namely ships and machinery, which contributed £0.2 billion and £0.4 billion respectively.
Putting it all together
Overall, the British economy seems to be doing okay. CPI readings held steady in May, but were still relatively subdued and still far away from the BOE’s target.
The labor market, meanwhile, looks pretty good since real wages continue to grow while the jobless rate slid to the lowest reading ever since October 2005.
As for GDP growth, the annual reading has been growing at an ever weakening pace for five straight quarter now and is also dependent on domestic demand to keep it afloat.
Looking forward, however, the available readings for the Q2 months look promising since retail sales readings were solid while manufacturing output saw the first year-on-year increase after 10 straight months of decreases, which caused industrial output to soar in April.
PMI reports also noted that clients are holding off on new orders because of uncertainty over the upcoming Brexit referendum, which implies that there would be an influx of business activity should Britons vote against a Brexit.