In this week’s economic update, we are going to focus solely on the UK economy. Within this we will investigate recent facts and data releases pertaining to key economic fundamentals such as the labour market, consumer spending, business investment and economic growth.
We are well on our way to the half-way mark of 2019 – where does the time go?
The good news is that stock markets have rebounded, and levels of volatility have subsided relative to what we experienced at the back end of last year.
The one nagging and constant feature in the forefront of everything is Brexit. We cannot seem to move forward on that front. Moreover, the UK has been granted an extension of Article 50, so we will have to wait until October to leave, or not!
Although the fracturing of politics has been happening before our eyes, we have kept focusing on economic fundamentals and the facts that matter to all of us: Job prospects, wages, prices and the general health of the UK economy. In all cases we have seen improvements, despite the best attempts of media commentators to talk these down.
In this edition of our economic weekly we highlight those four items mentioned above.
First up, the labour market:
Despite the turmoil surrounding Brexit, and dire predictions of job losses, the UK’s labour market has shown not only spectacular resilience but ongoing improvement too.
Since 2013 there has been a substantial and unwavering decline in the UK’s unemployment rate. The latest figure, defying expectations of gloom and doom, edged even lower from 3.9% to 3.8%. This is the lowest level of unemployment since 1974.
Chart 1: UK Unemployment Rate
Source: Bloomberg, May 2019
Unearthing this further, employment figures show a further 100,000 jobs being added from the previous quarter and the proportion of women in work is now at the highest level since records began.
Next – wages and prices:
As job prospects improve wage growth is responding positively. Undoubtedly, wages have been slow to respond in this current cycle, but respond they have; growing by 3.5% over the year to February then dipping slightly to 3.2% in March. This minor dip between February and March is not problematic though as wage growth is still outstripping inflation.
Inflation, thankfully, has been relatively contained. We all feel the impact of rising prices and take note of them happening with a sense of annoyance but tend not to register price falls with the same veracity.
We can see from the chart below that the Consumer Price Index (CPI), measuring inflation, has remained quite subdued. Yes, prices have increased but probably not as much as we think. Inflation has now fallen back to below the Bank of England’s (BoE) 2% target, at 1.9% in March.
Chart 2: UK Wage Growth & Inflation (CPI)
Source: Bloomberg, May 2019
An important aspect to note is the difference between the two measures above. The gap is what is referred to as real wage growth. The gap now is positive. This is an important factor because it reflects a greater level of disposable income, which in turn can translate into higher consumption, a key component of GDP.
But what about consumption;
Spending patterns tend to be erratic, and seasonal. Spending intentions are heavily impacted by levels of confidence. In chart 3 we see spending, depicted by retail sales, being curtailed in the aftermath of the Brexit vote in 2016.
Chart 3: UK Retail Sales
Source: Bloomberg, May 2019
However, data compiled last week by the Office for National Statistics (ONS) shows that sales in March 2019 increased by 6.7% on the previous year, far outpacing market expectations of 4.6%; This is the sharpest increase since October 2016.
Finally, the health of the UK economy;
Disappointingly, business investment during the Brexit period has been constrained. It is one of the main reasons both the UK and European Governments are so keen to get a deal agreed. Recently we had a better piece of news. Despite politicians dithering, as Milton Friedman said “the business of business is doing business” and in the first part of the year corporate investment grew 0.5% quarter on quarter (Chart 4). This latest figure defied analysts’ much lower expectations and halted four consecutive quarters of contraction.
Chart 4: UK Business Investment
Source: Office for National Statistics, May 2019
The Bank of England said improved business investment was brought about by;
• the UK’s tighter employment market
• low interest rates, translating to low cost of finance
• robust returns on capital
According to the ONS, the value of goods and services (gross domestic product or GDP) increased from a sluggish rate of 0.2% in the last quarter to 0.5% this quarter (Chart 5). UK economic resilience at the start of 2019 runs counter to indications of weakness shown by many business surveys, which suggested that global weakness would pull the economy down.
Chart 5: UK Economic Growth (GDP)
Source: Bloomberg, May 2019
Brexit is still on the horizon. We will have to face it one way or the other. Despite this, it is reassuring that, given these levels of uncertainty, the UK does still have an array of positive economic fundamentals to fall back on. We have a strong labour market, contained price increases, wages picking up and the possibility of pent up demand from businesses unleashed once we break the Brexit deadlock.
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