UK Snapshot

09/06/2017 at 5:25 pm

Today is all about the election: uncertainty, Brexit, uncertainty over Brexit, the pound, the effect of uncertainty on the pound, the effect of an uncertain Brexit on the pound, etc. ad infinitum. As we have had occasion to observe before, speculation on unknowable outcomes is pure idleness. One might as well invest on the basis of the weather.

So while others preoccupy themselves with whimsical guesses about the impact of the country’s eye-popping day out at the polls, this blog will follow up its recent drains-up summary of the global banking system with a brief, brass-tacks tour of the UK’s current and prospective economic landscape.

Economists traditionally divide indicators into one of three categories: leading, lagging, and coincident. We will take a look at all of these in chronological order to serve both logic and completeness.

The classic lagging indicators are inflation and unemployment as they represent embedded economic trends, among other things.

Readers will know that price increases have been accelerating in Britain for some time, driven by sterling weakness and commodity strength. The rate of RPI inflation has more than doubled over the last 12 months from +1.6% to +3.5%, while CPI has recovered from near zero (+0.5%) to +2.7%. This might represent a normalization of price behaviour following an unusual depression, and / or turn out to be a relatively transient phenomenon. Although we know it is consistent with a sustained upward trend in economic activity, then, it is not possible to read this from the various inflation prints alone.

The labour market is a different kettle of fish. The longstanding claimant count measure of the unemployment rate hit a more than 40-year low of just over 2% last year and has bobbled around there ever since. The more highly-favoured, internationally comparable ILO survey measure has pointed towards a steadier recent strengthening, reaching a 40-year low of 4.6% in the March release down from 5.1% a year earlier. Both measures are indicators of rude economic health and suggest that the economy is now at or around full employment.

Coincident indicators occupy a broad universe: there is a lot of data on what people have been doing just now, from consumer purchases to business activity to construction. To cover all these bases we can look at retail sales, purchasing manager surveys and broad growth in GDP.

Retail sales came under a lot of scrunity earlier this year as evidence that consumer activity was being squeezed by higher prices. Monthly figures for this series are volatile but the annual increase for the year to April came in unexpectedly high at +4.5%, bang in line with the 12-month rolling average both currently and for the pre-referendum peaks of 2015. Consumer activity, by this measure, is currently strong.

The composite PMI measure provides a snapshot of business conditions across all sectors (manufacturing, services and construction). A reading of >50 indicates expansion; of <50, shrinkage. The May print came in at 54.4, a healthy but not overly exuberant result consistent with the pace of activity observed in both of the two prior quarters.

The second estimate of broad GDP growth for Q1 came in for much attention when it was released a couple of weeks ago. Revised down all the way from +0.3% on the quarter to +0.2%, and thus equalling the level attained back in the ancient past of Q1 2016 it was taken as evidence that Brexit fears were beginning to bite. Export growth in particular came in for some scrutiny as it seemed that net trade was failing to profit from cheap sterling. Fortunately, scrutiny of ONS methodology revealed that the export fall was largely an accounting offset against increased fixed capital formation pertaining to “non-monetary gold” [further detail available on request]. Look through the noise and the top line measure of real GDP growth over the year to Q1 reached +2.0%, 0.4% more than the rate for Q1 2016.

Finally, if we are to look to the future it is the leading indicators which are of most interest. The principal leading data are confidence surveys, so we will cover the main bases and take in the GfK consumer survey, the Lloyds UK Business Barometer and the EC Economic Sentiment indicator for the UK overall.

Consumer confidence has remained steady this year at between -5 and -7, a little higher than its long run (20 and 30 year) averages. The May figure actually ticked back up to the top of this very narrow range. This stacks up pretty favourably against the low of -12 hit in the aftermath of the referendum, the -29 seen five years ago and the low of -39 plumbed in the depths of the Great Recession.

The Lloyds series is a very volatile beast indeed so I have looked only at the rolling 6-month average. This has recovered all the ground it lost in the second half of last year, though remains lower than the peaks attained in 2014-15 (+37 as against +50 to +55).

Finally, the EC’s measure has shown a steady recovery from a referendum-driven dip last year to a range of 108-111, consistent with the highest ranges reached in the 2000s.

There, then, is a broad, conventional snapshot of the UK economy as it stands today, regardless of panic (or elation?) at the various politically-led uncertainties we now undoubtedly face. Readers will be able to make their own judgements as to our economic health, sickness, or for that matter, equilibrium as these data continue to evolve.

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