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UK economy on course for V-shaped recovery, says Bank of England economist

UK economy is on track for a sharp V-shaped recovery thanks to a faster-than-expected rebound but “considerable” risks remain, according to the Bank of England’s chief economist.

Andy Haldane, who also sits on the Bank’s interest rate-setting committee, said the recovery in the UK and globally had come “sooner and faster” than expected.

In a webinar speech on Tuesday, Mr Haldane said the UK economy was benefiting from a rebound in consumer spending since lockdown restrictions have begun to ease.

He said: “It is early days, but my reading of the evidence is so far, so V.”

He added: “The recovery in both the UK and global economies has come somewhat sooner, and has been materially faster, than in the Monetary Policy Committee’s May Monetary Policy Report scenario – indeed, sooner and faster than any other mainstream macroeconomic forecaster.”

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But he said there was the risk of a “vicious cycle” in the economy if unemployment proves to be higher than expected and warned against a return to the mass youth unemployment seen in the 1980s.

He said: “Risks to the economy remain considerable and two-sided.

“Although these risks are in my view slightly more evenly balanced than in May, they remain skewed to the downside.

“Of these risks, the most important to avoid is a repeat of the high and long-duration unemployment rates of the 1980s, especially among young people.”

His comments come after the Bank recently said it now expects gross domestic product to tumble by 20% in the first half of the year, which is far less than the 27% it predicted in its May forecast.

But governor Andrew Bailey warned at the time against getting “carried away” by signs the recession may not have been quite as steep as it expected, with the Bank launching another £100 billion of quantitative easing (QE) to help boost the economy.

Mr Haldane was the only one on the nine-strong Monetary Policy Committee to vote against increasing QE in the June meeting.

In his speech, he said if the economy continues recovering on a similar path as lockdown measures ease further, then the loss in annual GDP could be far lower than first feared, at 8% against 17% forecast in May.

But he cautioned some of this may be down to pent-up demand, as well as the massive Government support for households and businesses through the scheme to furlough workers on 80% pay.

With nine million workers currently furloughed, he said there was a risk of soaring unemployment when the Government support measures end, which could impact the path of recovery.

Mr Haldane said he remained “open-minded” about more action to boost the economy.

Official figures also on Tuesday showed the economy shrank by more than first thought between January and March, down 2.2% – the largest fall since 1979.

Data has shown GDP contracted by a record 20.4% in April, but Mr Haldane said this was “ancient history” with the UK and global economy now fully in the recovery phase of the crisis.

Source: Express & Star

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Coronavirus: UK economy shrinks two per cent in first quarter of 2020

The UK economy shrank by two per cent in the first three months of 2020 due to the impact of coronavirus, official GDP data showed today.

The slump showed the UK economy’s contracted at its fastest rate since the height of the financial crisis in 2008.

The lockdown, which started on 23 March, saw the UK economy shrink a record 5.8 per cent that month alone.

And April’s data is likely to be far worse for UK GDP growth. Almost all shops except supermarkets and pharmacies remain shut in the coronavirus lockdown. And millions of workers are furloughed, with chancellor Rishi Sunak extending the job retention scheme to October.

UK GDP shrank in all the economy’s key sectors over the quarter, the Office for National Statistics (ONS) data showed.

The services sector suffered a record 1.9 per cent decline, the production industry posted a 2.1 per cent slump and there was a 2.6 per cent drop in construction.

March suffers record hit to UK GDP

Those sectors suffered their biggest hits in March as the UK economy shrank a staggering 5.8 per cent. All sectors were badly hit, though services posted the worst drop, a decline of 6.2 per cent.

Jonathan Athow, deputy national statistician for economic statistics, said: “With the arrival of the pandemic nearly every aspect of the economy was hit in March, dragging growth to a record monthly fall.

“Services and construction saw record declines on the month with education, car sales and restaurants all falling substantially.

“Although very few industries saw growth, there were some that did including IT support and the manufacture of pharmaceuticals, soaps and cleaning products.

“The pandemic also hit trade globally, with UK imports and exports falling over the last couple of months, including a notable drop in imports from China.”

CBI: Government stimulus crucial to UK economy recovery

The CBI’s chief economist, Rain Newton-Smith, warned the full impact of the coronavirus lockdown is still to come.

But she pointed to government measures such as the extended job retention scheme, and loans for small businesses, as being crucial to the UK economy’s eventual recovery.

“The range of financial support for businesses and workers provided by the government has been a lifeline for many firms so far,” she added. “These schemes are critical in keeping companies afloat and they will need to adapt as the economy restarts.

“Reopening our economy will be a gradual, complex process. The Ggovernment’s new guidance has helped, giving businesses some flexibility for their individual circumstances. Ultimately, keeping health at the heart of a recovery plan will be key to sustaining an economic revival.”

BCC: UK facing coronavirus recession

The British Chambers of Commerce said the second quarter will likely see UK GDP plunge by a worse margin. A consecutive quarter of decline would signal a full-blown recession.

The BCC’s head of economics, Suren Thiru, said: “The speed and scale at which coronavirus has hit the UK economy is unprecedented. [It] means that the Q1 decline is likely to be followed by a further, more historically significant, contraction in economic activity in Q2.

“While a swift ‘V-shaped’ economic revival as restrictions are lifted may prove too optimistic, government support can play a vital role in avoiding a prolonged downturn. The extension of the furlough scheme was a crucial first step, but more needs to be done to ensure that the right support is in place to deliver a successful restart of the economy.”

UK economy enters ‘freefall’

Capital Economics’ chief UK economist, Ruth Gregory, warned March’s record fall was only the tip of the iceberg.

“March’s GDP figures showed that the UK economy was already in freefall within two weeks of the lockdown going into effect,” she said. “And with the restrictions in place until mid-May and then only lifted very slightly, April will be far worse.

“The gradual lifting of containment measures suggest that April will probably prove to be the low point. Nevertheless, we think that it will be a long time before activity returns to pre-crisis levels.”

The dour outlook for the UK economy pushed the FTSE 100 lower today.

London’s blue-chip index fell almost one per cent this morning. However, the two per cent fall in GDP was better than a forecast drop of 2.6 per cent for the UK, Avatrade analyst Naeem Aslam said.

But he warned that “the worst is still about to come”.

“The question is how the Bank of England is going to look at this economic data,” Aslam said. “And if they will continue to rule out the negative rates and if they will expand their loose monetary policy further. But currency traders are more focused on forward-looking factors such as the Prime Minister’s three-stage plan to open the economy.”

By Joe Curtis

Source: City AM

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Bank of England rate preview: markets braced for GDP forecasts

Andrew Bailey hosts his second BoE meeting, but the volatility could come from forecasts rather than any shift in their monetary policy framework.

When and where?

With the Covid-19 crisis keeping everyone locked up, the forthcoming Bank of England (BoE) monetary policy meeting will be virtual, taking place on Thursday 7 April 2020. Most notably, this announcement will take place at 7am local time, rather than the usual midday timing.

Will we see any change to monetary policy?

The coronavirus crisis has seen central banks across the globe push the boat out in a bid to minimise the fallout from global lockdowns that have affected businesses and individuals alike.

In the UK, Governor of the BoE Andrew Bailey didn’t mess about, slashing interest rates to 0.10% and expanding the quantitative easing (QE) program by £200 billion in his first week as the governor. That QE programme stands at £645 billion, and remains a tool which could be expanded when it is deemed necessaryto support the governments push to mitigate the virus fallout. Some have speculated that the timing of this meeting (pre-market open) could highlight a potential market moving announcement such as further QE in the offing. On the interest rate side of things, there is arguably little left to benefit from implementing lower rates, with the restrictions on movement and businesses inhibiting the ability to borrow and invest.

With that in mind, markets are currently pricing in a 99% chance that the committee will keep rates steady at the forthcoming meeting.

What should we look out for?

Perhaps the most interesting part of the meeting comes in the form of the forward looking guidance on where inflation and particularly growth could be in the quarters ahead.

With UK prime minister Boris Johnson showing few signs of reopening the economy in the coming weeks, the global growth picture for second quarter (Q2) is dour. For markets, this expectation of huge economic contraction could see the pound hit hard, with some looking for a figure in the -35% region for the quarter. From an inflation perspective, we are seeing global disinflation take hold, and that is likely to be reflected in forecasts. Remember that low inflation also means looser monetary policy for the foreseeable future irrespective of the coronavirus response needs.

Aside from the growth and inflation forecasts, markets will also be on the lookout for guidance on how the BoE sees the recovery playing out. Thinking back to the Federal Reserve (Fed) and European Central Bank (ECB) meetings from last week, there has been a clear focus on avoiding expectations of a sharp v-shaped recovery for growth, with the road back to health likely to be drawn out given the speculation that it could take over a year to create a vaccine or cure for this virus.

Where now for the pound?

The pound has been on the rise since its mid-March low, with the pair ultimately reaching resistance at the 200-day simple moving average (SMA) level. That has proven a key roadblock to further gains, with the second attempt to break higher once again faltering at that indicator.

This could be a bearish signal coming into play, with the rally seen over almost two-months looking like a potential retracement and precursor to further downside. Much of that sentiment will be driven by wider market movements, with GBP/USD looking remarkably like the FTSE 100 given the inverse correlation between the dollar and global stocks. Nevertheless, there is a chance we could see the pound suffer if forecasts signal potentially a huge decline in Q2 gross domestic profit (GDP).

With that in mind, we could ultimately top out at the 200-day SMA, with a breakdown below 1.2247 providing a bearish reversal signal. As such, the wider outlook will be determined by the ability to break either 1.2247 or 1.2648.

By Joshua Mahony

Source: IG

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UK: Rate cut coming as consumption risks build

Like everywhere else, there is a rising risk that the Covid-19 demand shock will cause a decrease in GDP in the second quarter. We expect the Bank of England to cut interest rates later this month, although the bigger focus for markets should be the forthcoming budget, which arguably offers greater scope to tackle the virus impact.

Coronavirus supply shock risks morphing into demand issue

Since December’s election, the UK economy had been showing some tentative signs of life. Confidence had increased, and there were tentative signs that business activity was rising – albeit perhaps not quite to the same magnitude that some surveys had suggested.

But that’s now likely to change. As we’ve seen in other developed economies, supply chains have been disrupted by issues with sourcing Chinese-made components. Our trade team estimates that around 0.8% of UK output is reliant on value-added from China, although this is unsurprisingly higher for the electronics/electrical equipment industries at around 4%. While the former number may not sound too high, it masks the fact that subsequent parts of the production process may not be able to operate without overseas components. PMIs suggest there are increased delays for manufacturer deliveries.

Like the US, we estimate that roughly 20% of consumer spending is more exposed

The question now facing policymakers is how large the demand shock might be, now that the government is expecting a wider outbreak of the virus in the UK. Incoming Bank of England Governor Andrew Bailey said on Wednesday that “what we need frankly is more evidence than we have at the moment”, explaining perhaps why policymakers opted against joining the Federal Reserve in a coordinated rate cut.

Like the US, we estimate that roughly 20% of consumer spending is more exposed – things like restaurants/cafes (which make up 7%), hotels, transport, among other things. But unlike America, consumer activity has already been fragile for the past couple of years.

Consumer goods/services most exposed to virus impact

Admittedly confidence has recovered a little since the turn of the year, and real wage growth should be stronger this year, buoyed by a combination of lower regulated household energy bills and a tight jobs market.

However, the UK household savings ratio – currently 5.4% – is lower compared to historical standards, and has fallen over recent years, partly following the rise in import costs following the Brexit referendum. That’s quite a bit lower most international peers – the likes of France, Germany and the Netherlands have savings ratios comfortably above 10%.

There has also been a lot of focus in the media about the UK’s lower statutory sick pay levels. Employers are obliged to pay an amount equivalent to a little under 20% of the UK’s average salary if an employee is unwell – or in this case, self-isolating. Policies vary considerably across Europe, but according to an EU report, the rate of income replacement from sickness benefits/rules in the UK is one of the lowest. Sick pay also doesn’t apply for self-employed workers, and in the UK has a slightly higher rate of self-employment than the EU average.

Fiscal and monetary action is coming

This all suggests risks to consumer spending, and we are pencilling in a contraction during the second quarter (although of course, this depends on how far the virus was to spread). To us, this suggests the Bank of England will cut rates by 25 basis points at its next meeting later in March. However, policymakers will be looking closely at the forthcoming budget, where there arguably will be greater scope to limit the economic fallout.

Like other central banks, BoE officials will be acutely aware that there is only so much their own policy announcements can do to solve what is more of a cash flow risk for firms, rather than a debt-serving issue for firms affected by the virus

Following the change in Chancellor, there was a lot of excitement among investors that the Treasury was poised to offer a large amount of fiscal stimulus. It is likely that the government will commit to substantially raise government investment over the coming years, but the Chancellor is much more constrained on day-to-day spending. A fiscal rule, which commits the government to balance current spending in two-to-three years offers very little headroom to lift spending without taxes – particularly given the extra costs associated with managing Covid-19.

The government has already announced it could expand its “Time to Pay” system, which allows struggling firms to pay back tax bills over a longer period of time in smaller instalments. Andrew Bailey also implied there was a joint Bank of England/Treasury programme in the works to give SMEs access to extra finance.

Like other central banks, BoE officials will be acutely aware that there is only so much their own policy announcements – which may also include some other credit easing measures – can do to solve what is more of a cash flow risk for firms, rather than a debt-serving issue for firms affected by the virus.

By James Smith

Source: ThinkIng

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Bank of England holds interest rate at 0.75 per cent

The Bank of England has decided to hold interest rates at 0.75 per cent in its last meeting of 2019 as it warned there was little chance of significant economic growth this quarter.

The Bank’s Monetary Policy Committee (MPC) voted 7-2 in favour of maintaining the rate, as it did at its previous meeting in November.

Sterling lost roughly half a per cent against the dollar after the announcement.

UK GDP increased by 0.3 per cent in the third quarter and is expected to rise only marginally in the year’s final quarter.

The monetary policymakers did point out that both sterling and the FTSE had rallied in the last month, with the pound’s exchange rate appreciating by around two per cent.

Minutes from the three-day meeting showed that Jonathan Haskel and Michael Saunders had voted to cut rates by 0.25 per cent.

The two argued: “The economy had been a little softer than expected, and there was a modest but rising amount of spare capacity.

“Core inflation was subdued. Employment growth was slowing and seemed likely to weaken further given trends in vacancies and firms’ hiring intentions.”

However, the MPC said it was yet unclear whether Boris Johnson’s victory would lift the uncertainty hanging over the UK economy.

The MPC said: “If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.”

It added: “Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.”

Analysts said that the Bank’s wait-and-see approach was “perfectly appropriate for some time yet”, due to the reduction in political risks from the result of the General Election.

Dr Kerstin Braun, president of Stenn Group, said: “Boris Johnson’s win provides the much-needed solidity the UK has been craving.

“Businesses can begin to see their future and now Brexit is confirmed to go ahead, The Bank of England needs to keep the economy steady as we navigate Britain’s exit from the EU.

“But a prolonged period of low growth, low inflation, and low interest rates will limit the Bank’s ability to create stimulus when needed.”

There had been speculation that the MPC would commit to a rates cut. In the Bank’s November meeting, two of the nine-member committee voted for a cut.

The decision comes after inflation data showed that the Consumer Prices Index stood at 1.5 per cent in November, flat on October and half a per cent below the Bank’s target of two per cent.

Earlier this month the US Federal Reserve left interest rates on hold, bringing to an end the cutting cycle instigated in July.

The European Central Bank also held rates in Christine Lagarde’s first meeting as president, downgrading its 2020 growth forecast in the process.

The announcement comes after the Bank said it had referred the hacking of its market-sensitive press conferences to the financial watchdog, after it emerged that an audio feed was supplied to high-speed traders before they were officially broadcast.

The Bank confirmed what it called a “wholly unacceptable” use of a back-up audio feed by a third-party supplier, and said it had reported the matter to the Financial Conduct Authority (FCA).

By Edward Thicknesse

Source: City AM

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New figures show UK economy a little larger than thought

Britain’s economy is slightly larger than previously thought, according to new official estimates published on Tuesday that take into account new methodology and data.

The Office for National Statistics added around 26 billion pounds to the size of the world’s fifth-biggest economy in 2016, a rise equivalent to around 1.3% of gross domestic product and bringing total output to just under 2 trillion pounds.

The ONS regularly updates its methods for measuring the economy, which usually results in slight increases to its size.

The latest estimates used new surveys on costs faced by businesses and “significant” changes to the way capital assets such as buildings and machinery are measured.

Average annual growth in the economy between 1997 to 2016 is now estimated at 2.1%, up from 2.0% previously.

“These new figures are produced using new sources and methods, giving significantly improved estimates of how money moves around the UK economy,” Rob Kent-Smith, head of GDP at the ONS, said.

“While these figures are calculated using more and better information than was previously available, overall, they paint a very similar picture about the size and growth in the economy to our current estimates.”

The new figures showed the economy contracted by 6.0% during the financial crisis, a smaller drop than the 6.3% estimated previously. The economy also returned to its pre-crisis peak in early 2013, slightly sooner than thought beforehand.

Reporting by Andy Bruce; Editing by William Schomberg

Source: UK Reuters

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UK borrowing grows as new PM prepares to take over

Britain’s budget deficit swelled in the first three months of the tax year, official data showed, putting the public finances on a shakier footing even before a new prime minister moves into Downing Street next week clutching costly spending pledges.

Boris Johnson — the front-runner to succeed Theresa May — and rival Jeremy Hunt have both made pledges of tax cuts and higher spending which independent analysts say will cost tens of billions of pounds.

Britain will suffer a similar fiscal hit if it leaves the European Union without a transition deal on Oct. 31, something neither candidate has ruled out.

The government’s budget forecasters on Thursday put the cost of a no-deal Brexit to the public finances at about 30 billion pounds a year.

On Friday, the Office for National Statistics said public borrowing in June was the highest in four years for that month at 7.2 billion pounds — above all forecasts in a Reuters poll of economists and up from 3.3 billion pounds a year earlier.

“Disappointing news on the public finances to greet the new prime minister and chancellor,” Howard Archer, economist at consultants EY ITEM Club, said in an email to clients.

In the three months to June, borrowing was a third higher than in the same period in 2018 at 17.9 billion pounds.

June’s extra borrowing was driven by increased interest costs for inflation-linked government debt and higher spending on public services, compounded by stagnating tax revenues.

Corporation tax receipts — a small part of overall revenue — showed the biggest year-on-year fall since 2013, though payroll taxes continued to rise solidly.

Samuel Tombs, an economist with Pantheon Macroeconomics, said the figures were a tentative sign that the economy was flagging, but the higher debt costs were probably a one-off linked to the timing of Easter which pushed up inflation in April this year, affecting payments in June.

While data early in the financial year does not always offer a good guide to full-year performance, Friday’s figures showed public spending was running ahead of forecast.

In March, Britain’s Office for Budget Responsibility predicted public borrowing would rise to 1.3% of GDP or 29.3 billion pounds in 2019/20 from a 17-year low of 1.1% in 2018/19.

FISCAL DISCIPLINE LOOSENING
On Thursday, the OBR described Johnson’s and Hunt’s campaign pledges of tax cuts and increased spending as “expensive” and said commitment to fiscal discipline was slipping after years of public spending restraint.

Johnson has called for big tax cuts for high earners, reduced payroll taxes and more spending on schools and police. Hunt has promised a large cut in the rate of corporation tax.

“The imminent change of Conservative leader … looks highly likely to result in a significant change of tack on fiscal policy,” EY’s Archer said.

Neither candidate has endorsed finance minister Philip Hammond’s budget goals of keeping the budget deficit below 2% of GDP and lowering public debt as a share of GDP.

Friday’s figures showed public sector net debt totalled 83.1% of GDP in June, excluding public-sector banks, or 74.8% once the effect of a temporary Bank of England lending scheme was stripped out too.

Britain’s debt-to-GDP ratio was below 40% before the 2008/09 financial crisis.

Editing by Catherine Evans

Source: UK Reuters

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Brexit stockpiling helps UK economy grow 1.8 per cent in early 2019

Brexit stockpiling gave a 1.8 per cent boost to the UK economy in the first quarter of 2019 compared to the same quarter last year, figures confirmed today.

UK GDP rose 1.8 per cent in January to March compared to its corresponding 2018 quarter.

That figure beat the 1.4 per cent quarterly growth between October and December last year, the Office for National Statistics (ONS) said.

The economy grew 0.5 per cent on a quarterly basis, unchanged from the ONS’s initial estimate.

The services sector offered the biggest economic boost, followed by production, thanks to a 1.9 per cent rise in UK manufacturing output.

Brexit stockpiling underpins UK economy

Brexit stockpiling underlined the growth in UK manufacturing ahead of the UK’s potential no-deal Brexit departure on 29 March, the original deadline for leaving the EU.

In fact, stockpiling added 0.9 percentage points to the first quarter growth rate of 0.5 per cent.

Howard Archer, chief economic adviser to the EY Item Club, said: “There was a major boost to first-quarter GDP growth from stockpiling as businesses and, very possibly to a limited extent, consumers looked to protect their supplies in case a disruptive no-deal Brexit occurred at the end of March.

“Additionally, unseasonably warm weather gave a boost to consumer spending in the first quarter.”

Business investment finally grows

Business investment rose 0.4 per cent quarter-on-quarter after dropping in every quarter last year.

Archer called it “welcome news” but added that he was “sceptical” that this was the start of an upturn in spending.

The economist pointed to “ongoing major Brexit, UK domestic political and global economic uncertainties”.

Business investment was still 1.5 per cent lower than it was in the same quarter a year ago.

No-deal Brexit could weaken GDP growth

Tory leadership contest frontrunner Boris Johnson is set to take the UK out of the EU in a no-deal Brexit on 31 October if a deal cannot be reached.

And in the week that Bank of England governor Mark Carney warned market fears of a no-deal Brexit have risen, economists warned of the possible fallout for the UK.

Archer said: “Under a no deal scenario, we suspect that GDP growth is likely to come in at just 0.3 per cent in 2020, with the economy likely suffering stagnation or even mild recession over the first half. Growth is seen picking up to 1.2 per cent in 2021.”

Meanwhile a delay to Brexit would extend uncertainty, sending GDP growth in 2020 to around 1.3 per cent, he predicted.

“Much would depend on how long the delay to the UK’s departure was and what final form Brexit took,” Archer said.

UK inflation rise could cause recession

However, economists and experts warned that the growth could turn into a recession if UK inflation rises.

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said: “With investors already on edge over a global slowdown, they remain eagle-eyed for any further indication of weakness at home. If inflation starts to slide, concerns will increase that we are heading towards a deflationary recession.

“With the no-deal Brexit cause rejuvenated, political uncertainty continues to wrack the minds of investors, and businesses are refraining from deploying capital. The UK economy will likely remain sluggish until the Brexit dilemma is finally resolved.”

By Joe Curtis

Source: City AM

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British Pound Sheds Value on News UK Economy Shrank in April

Pound Sterling reacted negatively to data out Monday that shows the UK economy shrank 0.4% in April 2019 according to the latest set of monthly growth data from the Office for National Statistics.

Markets had been expecting a disappointing reading, although not by this margin, as the estimate by economists was for a decline of 0.1%.

The disappointment corresponded with a fall in the Pound-to-Euro exchange rate from 1.1250 to 1.1225, while the Pound-to-Dollar exchange rate fell from 1.2718 down to 1.2695.

We were not anticipating much of a reaction to the data by Sterling, however it appears the scope of the disappointment could not be ignored by foreign exchange markets.

The ONS report that while the economy shrank 0.4% in April, it grew 0.3% in the three months to April.

“GDP growth showed some weakening across the latest 3 months, with the economy shrinking in the month of April mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns,” says Rob Kent-Smith, Head of GDP at the ONS. “There was also widespread weakness across manufacturing in April, as the boost from the early completion of orders ahead of the UK’s original EU departure date has faded.”

Separate data released by the ONS shows the manufacturing sector contracted 3.9% on a month-on-month basis in April, where forecasts had suggested the market was eyeing a shallower decline of -1.1%.

Industrial production meanwhile contracted 2.7% in April where markets were expecting contraction of 0.7%.

The disappointing data heaps further pressure on Sterling which is already struggling under the yoke of political uncertainty with the Conservative Party’s leadership race now fully underway and suggesting that the likely winner will only see success if they are open to courting a ‘no deal’ Brexit.

Pound Dollar

Above: The clear reaction by Sterling against the Dollar to the GDP data release.

GDP and Pound Euro

Above: The clear reaction by Sterling against the Euro to the GDP data release

“Sterling though has clearly been unwilling to completely write off the weakness, perhaps also concerned that the drop in industrial sector output is a sign of some of the disruption that could be to come, if the UK were to face a very disorderly Brexit. Indeed, Sterling has fallen to stand at $1.2685 against the USD, from around $1.2725 before the data,” says Victoria Clarke, an economist with Investec.

Bank of England financial modelling suggests under a ‘no deal’ Brexit there would be a negative hit to the UK economy and a substantial readjustment lower in the value of the Pound.

The economic statistics out Monday will serve as a reminder to currency traders and investors that the UK faces significant economic vulnerabilities over coming months due to ongoing political uncertainty.

Responding to the data, James Smith, Developed Markets Economist at ING Bank, says the slippage in UK economic activity in April “is almost entirely down to a Brexit-related correction in manufacturing.”

The outlook for the economy going forward remains difficult says Smith:

“The wider growth story continues to look fairly bleak. While consumer spending may be a little stronger given the modest improvement in real wage growth, investment is likely to continue falling over the summer as Brexit uncertainty weighs on decision-making.”

Expectations for further uncertainty on the horizon is expected to ensure the Bank of England opts to keep interest rates unchanged for the remainder of the year.

“Rising concerns about a possible ‘no deal’ Brexit, as well as the growing likelihood of a general election in the autumn, make it more likely that the central bank remains on hold through this year,” says Smith.

For Sterling, an interest rate rise – in response to rising wages and inflation – would have offered a rare source of support as currencies tend to rise when their central bank is raising interest rates.

However, it now looks as though the UK’s resilient economy might no longer offer the support the Pound has come to rely on over recent months.

John Hawksworth, Chief Economist at PwC, says the UK should however avoid recession and see modest growth over coming months:

“After a strong first quarter, GDP fell back sharply in April due to planned car factory shutdowns and the reversal of stockbuilding before the original Brexit date.

“Looking through these temporary fluctuations, underlying growth in the UK economy remains modest as Brexit-related uncertainty continues to weigh on business investment. Modest growth seems likely to continue through the summer and autumn, bearing in mind also the drag on business confidence from rising global trade tensions.”

rolling three month GDP growth

PwC reckon robust consumer spending courtesy of continued jobs growth and rising real earnings over the past year, as well as increased government spending, should buoy the economy.

“Balancing these positive and negative effects, we expect UK GDP growth to remain modest, averaging around 0.2% per quarter over the rest of the year,” says Hawksworth.

Written by Gary Howes

Source: Pound Sterling Live

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Sluggish economic growth to continue as demand for lending falls

The UK economy’s sluggish growth shows no signs of letting up, with all three major lending classes set to grow less than two per cent this year, new figures have revealed.

Despite an uptick in real incomes, demand for consumer credit is forecast to grow just 1.6 per cent this year and two per cent in 2020, the lowest rate of growth since 2013, according to the EY Item Club.

Mortgage lending will also remain stagnant, rising less than one per cent, as consumer confidence and a lack of supply continues to hit the property market.

Meanwhile, continued uncertainty around Brexit means business lending is expected to grow only 1.3 per cent this year, as businesses hit pause on major investment plans.

The sluggish forecast across lending classes is a best-case scenario based on a Brexit deal being reached by 31 October. Growth would be even lower if the UK were to crash out of the EU without a deal, according to EY.

“The weak economic outlook continues to hold back demand for lending,” said Omar Ali, EY’s UK financial services managing partner.

“It’s been a similar story for over a decade now and there’s little improvement in sight. Since the financial crisis, the expectation was that the economy would return to higher growth after a short period of sluggishness – this has never materialised and is not forecast to happen any time soon.”

It comes amid a slowdown in growth across the wider UK economy, which grew 1.4 per cent last year, its slowest rate since 2009. GDP growth is forecast for just 1.3 per cent this year, rising marginally to 1.5 per cent in 2020.

By James Warrington

Source: City AM