UK Economic Data Surprises Markets
The UK economy continues to endure tumultuous times, what with Brexit anxiety and multiple contractions. One of the broad sectors that has suffered recently is the services sector. IHS Markit reported that service sector growth recently hit its lowest reading in almost a year, compounding the UK’s problems. The services sector encompasses everything from food, retail, hospitality, education, banking and more. It also comprises 75% of the UKs gross domestic product. During August, IHS Markit data confirmed that growth expectations were 53.2, 0.6 points less than July and 0.3 points less than economists’ predictions. Based on the analysis, August has been the worst performing month since September last year.
PMI data ruffles the country’s feathers
Lower demand, and growing economic and political uncertainty are fuelling the current downturn in UK services. During times of increased economic uncertainty, people tend to hold off on big-ticket purchases and expense items. With weak business confidence levels, spending patterns are being curtailed across the board. Inflationary pressures are also coming home to roost, as a weak GBP is increasing the costs of imported goods and services from Europe. UK exports have increased since the GBP began depreciating, but this does not bode well for major retailers and automobile manufacturers which rely on imports for their clientele. Companies typically pass these costs on to consumers, or allow these rising costs to eat into their profits.
The PMI data indicates that the UK economy is struggling to emerge from the doldrums. Political pressures are generating increasing uncertainty in the financial markets. Fortunately, it’s not all doom and gloom for the UK economy. Weakness in the GBP has driven UK exports to record levels. Given the current economic outlook, the UK economy is likely to expand by as much as 0.3% during Q3 2017.
A weak GBP will shift the economy towards goods production. However, a slowdown in UK spending – the bulk of GDP growth – is deeply concerning. Various businesses are struggling as Britons hold on to their GBPs. Some of the hardest hit sectors include hairdressing salons, gymnasiums, cinemas, theatres, restaurants, hotels, spas etc. General economic activity is perhaps best described as ‘subdued’.
Ongoing concerns about the GBP
Towards the end of August 2017, the GBP slumped to an 8-year low against the EUR. Of course, the performance of the sterling had less to do with economic fundamentals than it had to do with ECB policy. The European Central Bank (ECB) and president Mario Draghi are looking to slow down monetary easing as the European economy turns the corner.
UK economists are somewhat concerned that the GBP could be approaching parity with the EUR, which would mean that the purchasing power of the pound would be severely curtailed. The current exchange rate of the GBP/EUR is 1.0924 (Tuesday 5 September 2017), and for the year to date, the GBP has plunged by approximately 6.7%.
The UK all share index – the FTSE 100 – moves in the opposite direction of the GBP. That the GBP recently managed to reverse course and trade above 1.30 to the USD drove the FTSE 100 index lower. Various geopolitical concerns are also weighing heavily on the UKs premier market, such as tensions with North Korea, and rising gold prices.
Even Russia chimed in on Pyongyang’s nuclear missiles program, stating that it could become a global planetary catastrophe. As always, investors seek safe-haven with rising geopolitical tensions and increased uncertainty. Capital flows from equities to gold have increased in recent weeks. The gold price is currently trading at $1,330 + per ounce, and rising. The 11-month low of the UK services sector put a damper on the GBP, but that helped the FTSE 100 index to rise over 7,370.
What do you feel about the impact of declining domestic expenditure on UK GDP, and rising geopolitical tensions with North Korea?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.