In today’s edition of Piponomics, we’ll take a look at the economic figures released from the U.K. this month in figuring out how the British pound might fare in the forex arena moving forward.
Let’s start off with the freshest piece of economic data from the United Kingdom: the preliminary GDP reading. Earlier this week, the U.K. printed a 0.5% growth figure for Q4 2014, short of the estimated 0.6% expansion and a few notches below the previous period’s 0.7% GDP figure.
Taking a look at the bigger picture, however, shows that the U.K. economy is actually performing better than the quarterly headline figures suggest. In fact, the country was able to post its strongest annual pace of growth since 2007, as the economy grew by 2.6% in 2014. U.K. Chancellor George Osborne even noted that this expansion was the fastest of any major economy.
Improvements in the U.K. labor sector have also been pretty impressive, as the economy added 29.7K jobs in December. This follows November’s 29.6K increase in hiring, upgraded from the initially reported 26.9K gain. With that, the U.K. jobless rate dropped from 6.0% to 5.8%, its lowest level in more than six years.
Apart from that, wage growth was also better than expected, with average hourly earnings climbing from an annualized 1.4% to 1.7% in November. This marks the third month in a row of wage inflation outpacing consumer inflation, indicating that developments in the employment sector would eventually translate to higher spending.
3. Consumer Spending
Speaking of consumer spending… The December retail sales data surprised to the upside with its 0.4% gain versus the estimated 0.6% drop. Components of the report revealed that a bulk of the increase was spurred by higher supermarket purchases and fuel sales. As it turns out, the Brits took advantage of the drop in oil prices to fill up their tanks and spend more on other items!
With that, the U.K. economy was able to chalk up three consecutive months of stronger than expected retail sales figures, as domestic demand has been responsible for shoring up growth in the past months. This is probably why the BOE and the U.K. government aren’t too concerned about falling price levels, as consumers are benefitting from their increased purchasing power.
Weak inflation figures weren’t so much of a surprise for the U.K. this month, as all economies are on the same boat when it comes to feeling the impact of the oil price slump. For the month of December, headline CPI fell from 1.0% to 0.5%, its lowest level in nearly 15 years.
Although the downturn in price levels means that the BOE won’t be hiking interest rates anytime soon, record low inflation might actually be good for the U.K. economy since it could allow households to stretch their budgets further. Besides, the U.K. is in much better shape compared to other major economies so BOE policymakers aren’t too concerned about a potential deflationary spiral just yet.
Overall, it seems that all is well for the U.K. so far, but it remains to be seen whether or not the economy can stay ahead of the pack and sustain its pace of recovery. Even with falling inflationary pressures, spending and growth have stayed resilient for now while hiring improvements suggest that further progress can be seen. Do you think the British pound is in for a strong rebound because of this?