Has the UK economy started to run out of steam?

Week Commencing Monday 4th August 2014


This Week in Brief



  • In the UK this week we have the all-important Services PMI figure, followed by the construction PMI figure and the BoE MPC meeting. We expect a mixed bag, with services growth complimenting a decline in construction numbers.

  • In the US we have a reasonably quiet week with trade data falling marginally on the month coupled with potentially positive preliminary non-farm productivity and unit labour cost figures.

  • In Europe the continuing situation in Ukraine continues to weigh on markets, and is likely to be the ongoing theme before Thursday’s ECB announcement. We expect no policy shifts from Mario Draghi as he waits to see if previous policy measures have a material impact on inflation. 


Overriding Market Themes


Starting with the US this week, the Bureau of Labour Statistics released its latest jobs report last Friday showing continued improvement. In total, 209,000 non-farm jobs were added, meaning for the first time since 1997 the economy has added 200,000 or more jobs in six consecutive months. Despite the excellent reading, 209,000 was slightly below economists expectations of 230,000, and the unemployment rate actually ticked up slightly to 6.2 percent, from 6.1 percent in June. Sector by sector, the biggest industry gainer was professional and business services that added 47,000 jobs. This was closely followed by Manufacturing, which added 28,000, retail added 27,000 and construction added 22,000 jobs. There is little expectation that this report will change the current course the Federal Reserve is on and push forward any schedule to raise interest rates. Especially when considered alongside the average earnings report which only rose 1-cent in July.


Sticking with the American theme, after suffering the sharpest contraction since the financial crisis began in the first quarter, the US economy appears to have rebounded this spring, providing fresh evidence that the country may have finally turned a corner. The latest GDP figures show that the economy expanded at an annual rate of 4 percent during the second quarter. Driving this momentous rebound was a 2.5 percent jump in consumer spending, outpacing the 1.2 percent increase over the winter. Healthcare spending, previously thought to be a significant catalyst for growth because of the implementation of the federal Affordable Care Act, contributed a meagre 0.08 percent of growth.


Moving back across the Atlantic, fears that the UK’s recovery may be losing steam emerged last week as new figures showed manufacturing grew at its slowest pace in a year. The latest Markit/CIPS PMI report showed the manufacturing sector dipped to 55.4 from 57.2 in June. This was the slowest pace of growth in the sector since 2013 and fell well below economists forecasts of 57.2. Fundamentally there is little wrong with the UK, and particularly the manufacturing sector. With the fear of rising UK interest rates and the impact of the Ukraine crisis, it is unsurprising that some activity is falling off. In further bad news, growth in new export orders fell to a four month low, while India blocking its first major global trade reform pact will also be felt keenly by British manufacturers.


GBP This Week


We have a busy week ahead for the UK with the release of the last PMI’s dominating the market. As usual, the most important of the two releases will be services PMI, which thankfully appears to be pointing towards a figure around 58.1 from 57.7 last month. Owing to the size and power of the UK service sector, we expect to see the strongest market response from this release, so it could be possible that Sterling can reverse some of its previous losses should this result impress.


Construction PMI will also be watched closely, especially at a time when the sector is both booming but running a risk of cooling down significantly. Mark Carney’s insistence that the housing market remains the biggest risk to the UK recovery has naturally got some people worried and weary of a Bank of England induced slowdown. These worries are expected to be reflected in this weeks PMI figure, with expectations pointing towards a fall from 62.6 to 62.1.


Finally, the Bank of England MPC decision on Thursday is expected to be more of the same as committee members continue to follow Mark Carney’s lead. We therefore expect both asset purchases and interest rates to remain steady at their current levels.


USD This Week


With a slightly less exciting week in store for the US, we will be watching out for Wednesday’s trade balance data and the release of labour market data on Friday. Starting then with the trade data report, where expectations point towards a moderate fall to USD -44.70 billion from USD -44.39 billion. This comes after the recent shale oil and gas boom propelled this indicator from USD -60 billion in 2009 to a peak of USD -34.45 billion in 2013.


Later in the week the release of preliminary non-farm productivity and unit labour costs provides a belated view at some of the alternate measures of labour slack. Markets are expecting them to both post a positive figure, yet with poor number posted in last weeks jobs report, it may well be that risks for these indicators remain to the downside.  


EUR This Week


With a rather quiet week ahead for the Euro we will have to wait until Thursday’s ECB announcement to see any price action. I do not expect to see any more policy changes from the ECB this month and thus Draghi’s testimony will be the one to watch. With inflation falling to 0.4 percent recently, there is certainly a larger than previously thought threat of deflation to contend with. However, we expect the ECB to remain steadfast in their current approach and wait for another quarter to see if this situation will improve given the recent measures which were introduced. 

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