UK economy limps to a new crisis

The latest data on the UK economy is bad. The forecasts are not so good either.

Article updated: 4 May 2018 10:30am Author: Michael Baxter

What worries me about the latest news on the UK economy is that the signs suggest things don’t seem to be getting much better.

The UK economy grew by 0.1 per cent in the first quarter of this year, or so suggests the first estimate from the Office of National Statistics, or ONS as PWLA say – that’s People Who Like Acronyms, by the way.

That was the worst growth rate since the final quarter of 2012.

Just as worrying, it follows a year of poor figures on UK growth.

UK quarterly growth in per cent, source ONS

Slide to view more
2018 0.1
2017 0.2 0.3 0.5 0.4
2016 0.2 0.5 0.5 0.7
2015 0.3 0.6 0.4 0.7

Maybe, at least, we will stop hearing those tiresome comments from the media, that the UK economy has done just fine since the Brexit vote.

In fact, the hard numbers from the ONS simply support what the purchasing managers indexes have been saying for some time.

What next

But then I read that the cold weather hit the economy hard in March. As I sit here writing, feeling early signs of hay-fever, looking forward to a sunny bank holiday weekend, it is easy to forget how the UK received a visit from the god of the North Pole just a few weeks ago. I have never been to the Arctic, but for a few days in March I began to get an inkling of what it must be like.

And all that snow hit the economy hard, especially construction, which saw a sharp contraction during the period.
So, if it was bad weather that did it, one would expect to see a sharp rebound in what was, after-all, a sunny April. You would expect that businesses, having suffered from all that lost production in March, would have put in that extra effort in April, got staff working over-time, trying to claw back March’s losses.

Alas, the purchasing managers indexes do not tell us this.

They were released this week. Let me move back into PWLA mode, because I am a person who likes acronyms. The PMI for manufacturing fell sharply to its second lowest reading in 17 months in April. The PMI tracking construction, did jump, from the 20-month low seen in March, to a five-month high of 52.5, but this is still a poor reading. It points to only a very modest rebound in March.

As for the key services sector, well, the PMI did rise a tad, up from 51.7 in March, a 20-month low, to 52.8. But that reading was still poor by historical standards, only a few points up on from the critical 50 mark which represents zero growth.

Markit, which compiles the PMIs, says that the data is consistent with 0.2 per cent quarterly growth.
In short, it was NBG – no bleeding good.

Global backdrop

Compare the UK figures with what is happening in the euro area. According to the latest figures out this week, the euro area grew at the quarterly rate of 0.4 per cent in April. It too slowed, but nothing like the slow-down in the UK.

The PMIs for the euro area, out today, were consistent with 0.5-0.6 per cent quarterly growth.

The US economy, on the other hand, grew at an annual rate of 2.3 per cent in Q1, or so suggests initial data from the US Bureau of Economic Analysis. Actually, for Q1, which is often disappointing in the US, that was a pretty good performance.

Back to the UK

If you are a regular reader here, you will know that I am a big fan of the Residential Market Survey from the Royal Institution of Chartered Surveyors. Not only is this index a good bellwether of the UK housing market, it is a good forward indicator of the UK economy. And it has now been stuck on a reading of zero for two months in a row. That means that in February and March, the number of surveyors who recorded rises in house prices was the same as the number who recorded falls. We will get data for April, next week.

The good news is that I see no indicators of imminent recession, but I do see a UK economy that is stuck in a very slow lane, while the euro area and US are at the very least, in the middle lane.

Further forward

The National Institute of Economics and Social Research, or NIESR as the PWLA call it, has the UK lagging behind the US and euro area for the rest of this decade.

Forecasted annual growth in GDP, in per cent, source NIESR

Slide to view more
UK 1.4 1.7 1.8
US 2.3 2.7 2.6
Euro area 2.5 2.3 1.9
Canada 3.0 2.6 2.3
Japan 1.7 1.2 0.9
China 6.9 6.6 6.3

I am going to quote Robert Peston’s latest book at this point: WTF.

Interest rates

As for interest rates, the slowdown in the UK economy means that a hike in UK interest rates this month is now highly unlikely. Many economists are penciling in an August rise. I am even having doubts about that. Meanwhile, in the euro area, inflation was down to just 1.2 per cent in April, a hike in interest rates in that region seems like a distant prospect.

But, I still hold to the view that the Trump tax stimulus, at a time when US unemployment is so low, will lead to higher inflation, meaning that US interest rates may rise at an even faster rate than is widely being forecast. I would not be surprised to see US rates exceed three per cent by the end of this decade – unless that is, the tax cuts, which primary benefit the richer US citizens, simply lead to a rise in US household savings.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.