Lacklustre - Economics Weekly

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Lacklustre - Economics Weekly

Hope fades that the UK economy managed to step up a gear in Q2. Most estimates now suggest quarterly UK GDP growth was 0.3% in the three months to June, barely an improvement on Q1’s disappointing 0.2%.

Economic Analysis

10 July 2017

Soft. First, the good news. Manufacturing output was 0.4% higher in May compared to the same month in 2016. The bad news is that there are signs of fading momentum and manufacturing output fell 1.1% in the three months to May from the previous three months. Even taking into account a sharp fall in pharmaceutical production, which is notoriously volatile, it looks as if manufacturing is having a soft Q2. Chalk it up as another sign of weakening UK economic activity.

Down tools. Like the Australian cricket team, UK builders appear to be on unofficial strike. Output in construction fell by 1.2% in May, following a 1.1% fall in April. There were declines across the board, in new work as well as repair and maintenance. Only new public house building looked perky, up 6.8% since the start of the year, compared with a fall of 5.1% in the private sector. The IHS Markit PMI survey showed little chance of a turnaround in June, with orders weak and optimism falling. With near certainty the sector will make a negative contribution to Q2’s GDP.

Losing momentum. Overall June’s PMIs painted a strikingly consistent picture across services, manufacturing and construction. The UK continues to grow but the pace of growth is moderating. The PMI suggests growth in Q2 was 0.4%. That’s the ‘better’ estimate. Based on available data 0.3% looks more likely. That would be an improvement on the lacklustre 0.2% in Q1 but growth appears to have slowed as Q2 progressed. And 0.3% is below the long-run average. All sectors reported slowdown in the pace of incoming business, rising employment and above average inflationary pressures.

Common cause. In all three sectors, part of the blame for slowing growth is laid at the feet of political uncertainty and, specifically, Brexit. Services firms said that these factors were causing clients to withhold spending. While manufacturers remain optimistic, uncertainty is sapping their confidence. There is often a tendency to endow political developments with too much significance, for good and ill, so it remains to be seen how much they will affect growth.

Up, but…There’s been plenty written about the ‘bad’ consequences of the fall in sterling (steeper import prices, higher inflation, squeezed wage growth).
So what about the good? Has it boosted exports? Well, it seems yes it has. The three-month rate of export volumes is up over 6% since last June. The issue is that imports are also increasing, resulting in no noticeable narrowing of the trade deficit. In the three years to June 2016 the monthly trade deficit averaged £3bn. In the months since it has averaged, you’ve guessed it, £3bn.

In the zone. The past 12 months have been full of surprises, some even positive. One of the most unexpected has been the strength of the Eurozone’s recovery. Following an impressive 0.6% q/q expansion in Q1 GDP, the PMI suggests more of the same (if not stronger) in Q2. June’s reading of 56.3 remains just shy of April & May’s 6-year high (56.8) and the fifth above 56. Strong rates of new orders and employment growth are also encouraging. Meanwhile a strong currency is keeping a lid on inflationary pressures. What would the UK give for a strong (growth) and stable (inflation) economy?

More please. As screen writers know, what often matters is not the outcome but the expectation and starting position. Jeremy Corbyn’s ‘successful’ defeat is an example. So too is the Eurozone’s labour market. The unemployment rate was 9.3% in May. In almost any context this is high (the UK’s is 4.6%). That the story is about recovery and strength is largely because the unemployment rate is the lowest for eight years and down from a peak of 12.1%. However, 15.1 million are looking for work, which would make them the sixth largest member state by population. So good progress but more to do. 

One ‘Donald’ and three ducks. Donald Trump has pledged to create 25m jobs in the next decade, an average of 208k per month. Yet the US jobs machine hasn’t been firing on all cylinders of late. It last exceeded the 208k figure in February. So June provided a pleasant surprise with the US economy adding 222k jobs. Or to use the bingo lingo – three little ducks. But that still only represents a monthly run rate of 180k year-to-date. While the employment gains exceeded expectations, wage growth continues to disappoint. This provides food for thought for a Fed as it ponders another rate hike this year.

On the up. Growth looks to be accelerating in the US, according to the Institute of Supply Management (ISM). Its composite index rose by 0.7 to 57.4 in June. Across Q2 as a whole, the ISM says that growth was above 4%. That would be a substantial rebound from Q1’s disappointing score of around 1%.While inflationary pressures remain modest, should the economy continue at this pace the case will strengthen for more rate rises from the Fed.


This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Economics Department, as of this date and are subject to change without notice. 

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