UK economy remained in a severe downturn in May although the pace of the slump moderated from April’s crash and some companies benefited from the easing of coronavirus lockdowns around the world, a survey showed on Wednesday.
The IHS Markit Purchasing Managers’ Index (PMI) combining Britain’s huge services sector and manufacturing rose to 30.0 from 13.8 in April, up from a preliminary May reading of 28.9.
The index for services alone was also slightly higher than the preliminary figure but at 29.0 it was the second-weakest on record after April’s crash to 13.4.
Companies lost orders as clients slashed spending.
“Consumer demand also remained very subdued, with large areas of the service economy still in the planning stage of restarting business operations,” Tim Moore, economics director at IHS Markit, said.
Expectations rose modestly for a second month from March’s low. But businesses dealing face-to-face with customers were extremely concerned that social distancing measures would hold them back and push up costs.
On the positive side, some companies saw new orders from the Asia-Pacific region, where the recovery is more advanced, and from new online sales efforts.
But export orders continued to fall and some services firms said they were not taking work from abroad due to severe restrictions on travel.
Britain’s services PMI does not include retailers, who have been hardest hit by store closures since the March 23 lockdown, or many of the self-employed.
Consensus forecasts show UK economic growth of around 1.1% in 2020, down from 1.3% last year, with Britain likely to remain trapped in a low interest rate environment post-Brexit, according to Dr John Ashcroft.
Consensus forecasts show UK economic growth of around 1.1% in 2020, down from 1.3% last year, leaving Britain likely to remain trapped in a low interest rate environment post-Brexit, according to Dr John Ashcroft, author of The Saturday Economist.
‘Further talk of one interest rate cut in the UK and further cuts in the US as growth slows (possibly below 2% this year) suggest long rates will remain under pressure,’ Ashcroft said.
‘We remain trapped on Planet ZIRP [Zero interest-rate policy].’
UK Chancellor reassures firms about ‘no alignment’ with EU rules post-Brexit
Business leaders were eager for clarification after the UK Chancellor Sajid Javid said that there would be ‘no alignment’ with EU regulations in a post-Brexit trade deal with the EU last week.
‘Manufacturers like common standards on products and components in many markets,’ Ashcroft wrote in a blog post. ‘Common standards guarantee quality, generate lower unit costs, economies of scale and improve productivity.’
‘The Chancellor claimed the Treasury would not lend support to manufacturers favouring EU rules,’ he added. ‘That just does not make sense.’
However, the Chancellor has since toned down his rhetoric, which initially shocked British industry, with Javid clarifying that divergence from EU rules will only occur if it is in the UK’s economic interest.
FTSE 100 bogged down by uncertainty
The blue-chip index has had a mixed start to the new year, with it climbing more than 130 points in the first half of January, only to see those early gains eroded, with it tumbling a little over 2% this week.
The FTSE remains bogged by uncertainty on economic growth and the direction of sterling, according to Ashcroft.
A clear direction on Brexit with a planned exit at the end of the January this year saw the pound bounce to test the $1.34 level only to fall back to $1.31.
‘A test and proof of the $1.30 level may now continue for some time,’ Ashcroft added.
The FTSE 100 is trading at 7628 as of 10:15 (GMT) on Friday.
Britain’s economy grew at its weakest annual pace in more than seven years in November, raising expectations that the Bank of England will cut interest rates later this month.
Monday’s official figures showed the economy in November – before last month’s decisive election win for Prime Minister Boris Johnson – was just 0.6% larger than a year before, the weakest expansion since June 2012.
The November figure represented a slowdown from annual growth of 1.0% in October, after that month’s growth pace was revised up from previously reported data.
Output in November alone shrank by 0.3%, the biggest drop since April. Economists polled by Reuters had expected unchanged output for the month.
The weak data, reflected the uncertainty of last autumn about Brexit and the election, said John Hawksworth, chief economist for accountants PwC.
“It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer, but our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election,” he said.
Sterling fell and government bond yields headed lower as financial markets priced in a 50% chance the Bank of England will cut interest rates on Jan. 30, after its next meeting.
The BoE predicted in November that the economy would eke out limited growth in the fourth quarter, before recovering in 2020. That forecast assumes progress towards a post-Brexit trade deal and a reduction in U.S.-China trade tensions.
In the past week, BoE Governor Mark Carney – who steps down in March – and two other rate-setters, Silvana Tenreyro and Gertjan Vlieghe, said a rate cut could be needed if those assumptions prove over-optimistic.
Two more policymakers, Michael Saunders and Jonathan Haskel, already support a rate cut.
However, there have been some signs that business confidence has revived since Johnson’s Conservatives won an unexpectedly large majority in the Dec. 12 election.
That victory put Britain on course to leave the European Union on Jan. 31 with a transition deal. However, Johnson has only given himself 11 months to reach a long-term trade deal with the EU, and some businesses fear they could face tariffs and other obstacles to trade with the EU from 2021.
Looking at the three months to November, which smoothes out some volatility, the economy grew by 0.1% versus poll forecasts for a 0.1% fall, due to unexpected upward revisions to September and October output, which the ONS said reflected late survey returns.
“Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing,” ONS statistician Rob Kent-Smith said.
The majority of top executives at UK financial institutions are less optimistic about the country’s economic outlook than they were a year ago.
Almost 60 per cent of organisations said they expected UK economic growth to slow in the next 12 months, roughly twice as many as held that view last year, according to a survey published today by Lloyds Bank.
Two-thirds of companies surveyed said they expected domestic growth in the coming year to be weaker than in other G7 countries, in a stark indicator of faltering confidence.
The gloomy outlook was reflected in attitudes towards the financial services sector, with 55 per cent forecasting that growth would deteriorate in the year ahead, up from 27 per cent in 2018.
Despite these concerns, 40 per cent of firms said they expected their own revenue to increase over the next year. However, this figure was down from 64 per cent in 2018.
“Against a backdrop of ongoing global economic turbulence, it is unsurprising that sentiment among financial institutions towards the sector and the wider economy is lower than in previous years,” said Robina Barker Bennett, head of financial institutions at Lloyds.
“That said, the responses to this survey show the sector’s resilience during difficult times and it is especially encouraging to see that firms plan to continue investing in the UK.”
While the survey laid bare the impact of uncertainty in the run up to Brexit, it revealed more than half of firms feel they are prepared for the UK’s departure from the EU.
Just under 60 per cent of companies surveyed also said they were ready for a no-deal Brexit with little or no dependency on a transition period and no further extension.
Aside from Brexit, the figures showed executives are increasingly concerned about the risk of cyber crime, with 70 per cent saying they are now prioritising it as an area for investment.
UK economic growth slowed in the final quarter of last year as car manufacturing declined at its steepest rate in just under a decade.
Gross domestic product (GDP) growth fell to 0.2% between October and December, according to the Office for National Statistics (ONS).
This compares to 0.6% growth in the previous quarter, when warm weather and the World Cup contributed to a boost in economic activity.
Meanwhile, annual GDP increased by 1.4%, the weakest it has been since 2009.
Sterling tumbled following the news, dropping 0.4% versus the US dollar to 1.28. Against the euro, the pound was down 0.1% at 1.14.
But Prime Minister Theresa May’s official spokesman said: “The UK economy continues to grow and remains fundamentally strong.”
Car production was down 4.9% in the period, marking the biggest decline since the first quarter of 2009.
Total production output slipped by 1.1%, the largest decline since the end of 2012. This included a 0.9% dip in manufacturing.
Construction was also lower, dropping 0.3% in the fourth quarter. This follows two consecutive quarters of growth during the summer, when companies caught up with work delayed by adverse weather early in the year.
Although services output was up, growth slowed to 0.4% following a relatively strong performance during the summer.
The ONS said it reflected a slowdown across a number of industries, as Brexit-related concerns weighed on business-to-business spending at the end of 2018.
Speaking about the impact of a potential no-deal Brexit on the economy, Chancellor Philip Hammond told ITV: “Business is challenged, I accept that, but we can’t convey information that we don’t have. We don’t know how some of our partners on the other side of the channel will behave in the event of no-deal Brexit.
“My judgement is that we are likely to get the (Prime Minister’s) deal through Parliament but I can’t be 100% certain, and that is why we are doing the contingency planning we are doing. Once businesses have clarity, they will invest again.
“No deal would be a very bad outcome for economy,”
Rob Kent-Smith, head of GDP at the ONS, said: “GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.
“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.”
Compared with the same quarter in 2017, the UK economy is estimated to have grown by 1.3%, the weakest in six years. It was last weaker in the second quarter of 2012.
On a month-to-month basis, GDP fell 0.4% in December. This was the biggest monthly drop since March 2016.
Howard Archer, chief economic adviser at EY Item Club, said the figures were “disappointing”.
“The UK economy clearly changed down into a much lower gear in the latter months of 2018 as heightened economic, political and Brexit uncertainties fuelled business caution in particular,” he said. “There are also signs of consumers becoming more cautious despite a pick-up in their purchasing power.”
Samuel Tombs of Pantheon Macroeconomics warned against interpreting the data as evidence of an impending recession.
He said: “On the face of it, the sharp fall in GDP in December looks alarming, but it isn’t unprecedented — it also fell by 0.4% in March 2016 — and it was driven by sectors which have historically been volatile.”
Separately, the ONS data dump showed that Britain’s total trade deficit widened slightly in the last three months of the year by £900 million to £10.4 billion, due to a rise in goods imports including cars and chemicals.
The UK economy ended 2018 “stuck in a weak holding pattern”, according to what is billed as the UK’s largest private sector survey of business sentiment and a top indicator of UK gross domestic product growth.
The latest quarterly economic survey from the British Chambers of Commerce, published today and covering some 6,000 firms with a million-plus employees collectively – has flagged “stagnating” levels of growth and business confidence due to elevated Brexit uncertainty and other economic pressures.
Suren Thiru, the BCC’s head of economics, said the survey suggests UK economic conditions were “worryingly subdued” during the final quarter of 2018. The business body said the findings highlight the impact current levels of uncertainty are having on a “stalling” economy as growth in domestic sales and orders fell, recruitment difficulties sit near record highs and price pressures persist.
Looking at services firms, a key driver of UK economic growth, the percentage reporting an increase in domestic sales and orders fell to a two-year low – dropping from +22 to +18 and from +17 to +14 respectively.
It also saw recruitment difficulties hover at a near record-high, at 70 per cent, down slightly from the 72 per cent seen in the previous quarter, while the percentage looking to recruit rose to 50 per cent.
Additionally, struggles in hiring were the joint highest since the survey began in 1989 in the manufacturing sector, reported by more than four-fifths of firms, and those attempting to recruit remain unchanged at about two-thirds.
The BCC survey said the results “highlight the extent to which labour shortages have risen in the UK”, and indicate an increase in price pressures facing firms.
The percentage of manufacturers expecting to raise prices is at its highest in a year, at +43, up from +38 in the third quarter, and almost three times higher than its pre-EU referendum average.
Cashflow continues to be a concern for both sectors, with the balance of firms reporting improved cash flow remaining weak. The BCC called on all political parties to “find a way forward and ensure that the UK does not face a messy and disorderly exit from the EU”, helping boost business confidence and investment.
Adam Marshall, BCC director general, said: “Throughout much of 2018, UK businesses were subjected to a barrage of political noise and drama, so it’s no surprise to see firms report muted domestic demand and investment. In this new year, the government must demonstrate that it is ready to act to turbo-charge business confidence.”
He said the UK government should focus on providing clarity on conditions in the short term and avoid a “messy and disorderly” Brexit. “Business communities won’t forgive politicians who allow this to happen, by default or otherwise.”
UK economic growth has been revised up to 0.2% in the first quarter, as output from Britain’s construction sector came in higher than previously estimated.
Earlier readings of GDP by the Office for National Statistics (ONS) showed the economy grew just 0.1% – which would have been the slowest pace of growth in five years.
While the final reading means growth still halved from 0.4% in the final quarter of 2017, the slightly better measurement is likely to raise the prospect of a near-term interest rate hike by the Bank of England.
The ONS raised the figure in its final estimate after a notable upward revision in construction output, which mainly reflects improvements to the way the sector’s work is measured.
ONS head of GDP Rob Kent-Smith said: “GDP growth was revised up slightly in the first three months of 2018, with later construction data, and significantly improved methods for measuring the sector, nudging up growth.
“These improved methods, introduced as part of ONS’s annual update to its figures, will lead to better early estimates of the construction sector with smaller revisions in the future.”
The pound spiked in the wake of the data, rising 0.7% against the US dollar to trade at 1.317. Versus the euro, sterling was nearly flat, at 1.130.
Construction output growth was revised up by 1.9 percentage points over the quarter to negative 0.8%, while production output was revised down by 0.2 percentage points to 0.4%.
Services sector growth was unrevised at 0.3%.
The ONS reiterated that the overall impact of extreme wintry weather caused by the Beast from the East on output in the first quarter “appears to be relatively small.”
The Bank of England’s Monetary Policy Committee (MPC) now be watched closely for hints that an interest rate rise may be pushed through sooner rather later, with some voting members having previously held off following the sharp slowdown in growth.
Howard Archer, chief economic advisor at EY ITEM Club, said the upward revision to GDP, as well as the recent evidence of a pick-up in retail sales in the second quarter, “fuels our belief that the MPC is more likely than not to hike interest rates from 0.50% to 0.75% at their August meeting.”
“There is likely to be only one interest rate hike in 2018, leaving interest rates at 0.75% at the end of the year.
“We expect the Bank of England to raise interest rates twice in 2019 taking them up to 1.25% as it looks to gradually normalise monetary policy.”
Other ONS data showed the squeeze on living costs triggered by the collapse in the pound following the Brexit vote is easing.
Real household disposable income in the first quarter increased by 0.3% quarter on quarter, as wages increased at a faster rate than price rises.
It represents the second consecutive quarter of positive growth following over a year of negative growth.
However, the household saving ratio fell 0.4% to 4.1% as spending grew faster than income, the third-lowest quarterly saving ratio since records began in 1963.
Business investment was estimated to have fallen by 0.4% to £47.7 billion between the fourth and first quarter
The UK’s current account deficit was came in £17.7 billion, below forecasts of £18 billion, a narrowing of £1.8 billion from a revised deficit of £19.5 billion in the previous period.
The pound eased in afternoon trading today, following a disappointing second estimate of first-quarter GDP growth from the Office for National Statistics (ONS).
Sterling was down 0.31 per cent to trade at $1.3339 against the dollar, its lowest level since mid-December last year.
Lukman Otunuga, Research Analyst at FXTM said:
“This has already been a terrible trading week for the pound, as cooling inflation figures dented expectations over the Bank of England raising UK interest rates in August.
“Matters worsened on Friday following reports that UK economic growth dropped to its lowest rate since 2012.”
Figures from the ONS showed that UK GDP grew just 0.1 per cent in the first three months of the year, a sharp drop from the 0.4 per cent growth seen in the final quarter of 2017.
ONS figures also showed that GDP per capita shrank by 0.1 per cent between the fourth quarter of 2017 and the first three months of this year.
The country’s economic growth was heavily weighed down by a 2.7 per cent drop in construction output and a 0.2 decrease in business investment.
Household spending grew by just 0.2 per cent, the lowest growth since 2015.
The ONS warned of a “pattern of slowing growth, in part reflecting a slowing in the growth of consumer-facing industries”.
John Hawksworth, chief economist at PwC, said: “Overall, the figures confirm the view that UK growth was subdued in the first quarter, though we continue to believe that this overstates the underlying weakness of the economy, bearing in mind the strong jobs growth we’ve seen.”
The dollar was steady against a basket of major currencies this morning ahead of the upcoming speech from Federal Reserve chair Jerome Powell.