Confident Or Blind: Take Your Pick
UK JULY GDP MISSED EXPECTATIONS
The pound was unfazed by the disappointing start to the third quarter for UK GDP.
The economy grew by 0.1%m/m in July, well below the 0.5% rate expected by
financial markets and significantly weaker than the 1.0% increase recorded in June.
A slower pace of growth is to be expected in Q3 after the reopening of the economy
boosted activity in Q2. However, the July outturn means that the Bank of England’s
latest projection for an overall rise of 2.9%q/q in Q3 now looks optimistic, especially
if widely reported supply constraints – including in the availability of materials and
labour – continue to affect growth.
STRONG BUSINESS CONFIDENCE In the meantime, the Lloyds Business Barometer - a survey of 1,200 businesses across a variety of sectors in the UK - shows that underlying optimism for trading prospects and the wider economy is at a 3yr high. Viewed against the backdrop of the above constraints and the upcoming end of the Brexit grace period next month; it will be interesting to see in the months ahead whether this confidence is justified or is merely a blind spot in the nation's collective vision of the future.
UK INFLATION TO RISE SHARPLY
Higher commodity prices and supply chain disruptions, combined with recovering
demand, have helped to push up global inflation rates this year. In the UK, the fall in July annual CPI inflation to 2.0% was a temporary respite from the upward momentum. Analysts forecast UK August CPI inflation (Wed) to gap higher to 3.0%, driven by a confluence of factors including ongoing supply costs as well as the impact of base effects from last year’s hospitality VAT cut and the Eat Out To Help Out scheme. The rise would keep inflation on track to meet the Bank of England’s forecast for 4% by the end of the year.
STRONG LABOUR MARKET DEMAND
Also out in the UK are labour market data (Tue) and retail sales (Fri). Buoyant demand for labour was confirmed by the vacancy figures in last month’s report, which increased to over a million (a record high) in July, while the unemployment rate fell to 4.7% in the three months to June. Market watchers expect the unemployment rate to fall again to 4.6%, and employment to rise by 200k in the latest three months to July. As the end of the furlough scheme approaches, the hope is that those still furloughed (nearly 1.6m at the end of July, according to HMRC data) will be absorbed back into the labour market, thus preventing a significant rise in unemployment. That should be helped by strong labour demand, but there remains uncertainty over how quickly possible job-skill mismatches can be resolved.
Analysts also expect headline annual average earnings growth to ease back, but remaining above 8%, affected by distortions due to a greater proportion of lower-paid workers dropping out of the calculation. That was the reason for the government’s decision to temporarily suspend the state pension triple lock, which was announced at the same time as the increase in National Insurance contributions from next April for employees and businesses. As for retail sales, the expectation is for a rise of 0.8%m/m in August for the headline measure, rebounding partially from the 2.5% drop in July.
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