UK GDP Growth

The British economy grew by 0.2 percent on quarter in the three months to March 2018, following a 0.4 percent expansion in the previous period.

The UK economy has been growing at its slowest pace in more than five years with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly. The biggest downward pressure on the economy in the quarter, the ONS said, was a sharp fall in construction output, something that was impacted heavily by the colder than normal weather and large amounts of snow seen in the first three months of 2018.
Also bear in mind that the uncertainty surrounding the Brexit vote is putting a lot of UK business investment on hold, until things become clearer.

The services sector is the real powerhouse of the UK economy, accounting for almost 80 per cent of GDP. The latest PMI survey data signalled a solid upturn in overall business activity across the service economy, helped by the warmer weather, World Cup and Royal Wedding.

Industrial production in the UK is still struggling to recover from the recession, remaining around 7 per cent below its pre-recession size.

Construction output slowed in 2017. The sector met the definition of technical recession in the third quarter of 2017 as it contracted for two consecutive quarters.

Overall looking for an improvement in Q2 to 0.3%-0.4% vs 0.2% in Q1,
At the minute, Britain is in the bottom 3 of countries with least amount of growth in past year.

Consumer spending

Consumer demand accounts for nearly two thirds of aggregate demand so any weakening of consumer confidence and spending has a significant impact on the economy. Confidence is softening, in part because of economic uncertainties, and despite the very low rates of unemployment.

This is because;

  • Worries over the potential impact of Brexit
  • House prices are dropping in regions
  • Prospects of higher interest rates due to inflation, which will impact mortgages

 

Unemployment rate

The unemployment rate in the UK stood at around 4.2 to 4.4 percent in the past year and at its lowest since 1975.

 

Inflation and Interest rate

Since BOE raised the base rate from 0.25% to 0.5% in November 2017, inflation has dropped from around 3% last year, to around 2.4% now – still above the target rate of 2%.

Forecasters predict that rising inflation, driven by the depreciation of sterling, will squeeze household incomes and depress consumer spending, which has been the main driver of economic growth in recent years.

A lower pound has led to cost increases for manufacturers as well, who must buy their raw materials in international markets. But the rise in costs was passed on much quicker to companies to consumers and the pace of input price increases is now falling.

Oil prices are still quite high/rising and this will continue to impact consumer spending and investment by manufacturers.

 

UK 10 year government yield

The UK is currently able to borrow money for close to record low costs. Gilt yields remained low despite the Bank of England’s decision to raise interest rates in November 2017, reflecting market scepticism about further rate rises.

 

Sterling v Dollar

Since the vote to leave the EU, sterling has fallen markedly against the dollar. While exporters have long complained of being hindered by a strong pound, it does not necessarily follow they will get an immediate boost from a weaker currency, considering the highly uncertain trading environment.


Sterling v Euro

FTSE 100

Key dates;

29 Jan 2018 – January 2018 saw a rally in the FTSE 100 that led to record highs. Towards the end of January saw major indices around the world posting losses, as investors reacted to the possibility of interest rates being raised in both the UK and US, as wages and economic factors saw improvement and inflation picking up.

When inflation picks up, rates are likely to be increased, and in anticipation you get a selloff of bonds which reduces the price and increases the yield (to reflect a more accurate yield that will reflect when rates go up).
As rates have been so low lately, people have been forced into equities in an effort to generate some return. Now that yields are increasing on bonds, investors are selling off higher riskier stocks for safer returns.

There seems to have been a rapid change in sentiment, where instead of investors looking at the positives of Trump’s tax cuts, investors are now seeing tax cuts could end up causing the US economy to overheat if it’s already at full capacity.


20 March
– UK Inflation dropped to 2.7% in February, reducing the risk of a rate rise and sending the GBP cheaper. This was, by contrast, good for FTSE 100 that derives 75% of its revenues from overseas.

 

27 March – A trade war sparked by Trump between the United States, China and the EU resulted in negativity seen in stock markets all over the world. Donald Trump’s decision to slap tariffs on imported steel and aluminium from countries presents the world with problems – both the EU and China are export-driven economies, and restricted access to America – the world’s biggest market, would hurt. This could also hurt consumers if tariffs need to be passed on and it has come at a bad time for the UK, as Brexit still needs planning and the economy still fragile with a depressed Sterling.

In the US, growth is solid, unemployment is low, real incomes are rising, and taxes have been cut. It is believed that by the time of the 2020 election campaign, inflation will have crept up resulting in rising interest rates and slower growth. Trump has brought in protectionist policies at a time where growth is quicker than initially expected.


End of March 2018
– After progress with Brussels towards a two-year transitional deal to smooth Britain’s formal exit from the EU on 29 March 2019, the pound has risen back towards the highest levels seen since the Leave vote.


March to May 2018
 – Correlation between pound depreciating and FTSE100 increasing. Driven by uncertainity around Brexit, failure for the PM to reach a consensus with her cabinet and trade war that could hurt even more.

Why is Trump targeting China with tariffs?
Donald Trump believes Beijing is using unfair trade practices to gain an advantage on the US, which he says includes the “theft and abuse” of intellectual property rights of US firms, such as Hollywood films or IT systems.

He has also accused China of subsidising steel exports in a practice amounting to dumping – selling a product at an artificially low price – on the rest of the world, which he argues has hurt jobs in the US. He also takes issue with the size of the US trade deficit, or the imbalance between exports and imports, with China.


25 May 2018
– Business investment shrank by 0.2% during the quarter, while household spending only rose by 0.2% – the weakest reading in over three years.

House prices fell in May as a faltering economy, pressure on household budgets and the prospect of interest rate rises dogged the market. Surveyors continue to report subdued levels of new buyer inquiries, while the supply of properties on the market remains more of a trickle than a torrent.

1 June 2018 – In her first direct intervention after the US announced the tariffs would be imposed on the EU, Canada and Mexico, May said the US should immediately rethink its decision, warning it would have ramifications for US defence projects.

6 June 2018 – The EU will impose tariffs on US imports ranging from Harley-Davidson motorbikes to jeans from next month in retaliation over Donald Trump’s decision to put duties on European aluminium and steel.

11 June 2018 – Britain’s factories unexpectedly recorded the sharpest fall in output for more than five years in April amid falling demand for steel and electrical machinery, pointing to fewer orders for steel used in infrastructure projects and a wider slowdown in demand for British goods at home and abroad.

13 June 2018 – Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the US jobs market as “strong” and said economic activity had been rising at “a solid rate”.

US unemployment dropped to 3.8% in May, its lowest level since April 2000 and one of the lowest levels since the second world war.

20 June 2018 -The European Union has confirmed it will begin charging import duties of 25% on a range of US products on Friday. The move is in retaliation to the US tariffs imposed on EU steel and aluminium.

The EU tariffs will be placed on €2.8bn worth of goods, from Harley Davidson motor bikes to bourbon and peanuts.

26 June 2018 – Weaker than expected readings on the economy sent sterling tumbling earlier in the month, before the Bank of England indicated it could raise interest rates from as early as August.

The FTSE 100 lost more than 100 points in the past few weeks. amid mounting fears over a global trade war triggered by Donald Trump’s trade tariffs. The president refused to exempt the European Union (including the UK), Canada and Mexico from steel and aluminium tariffs on imports from outside the US, while threatening $200bn (£151m) of additional tariffs on Chinese imports.

Despite petrol prices rising to the highest level for almost four years, UK inflation unexpectedly remained at a one-year low in May.

The UK’s dominant services sector expanded more quickly than expected in May, which includes banks, restaurants and hotels, recovering to a three-month high. The construction and manufacturing sectors also recorded stronger-than-expected growth.

3 July 2018 – looks bleak for construction sector as some large contractors blame Brexit uncertainty for the delay or cancellation of projects.

4 July 2018 –  Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher.

6 July 2018 – Forecasts show the American economy would suffer a 2.5% drop in GDP as a result of falling trade volumes alone over three years, should the White House increase US import tariffs by about 10 percentage points on all of its trading partners. The world economy would take a hit to GDP of just over 1%, while there would be a smaller impact on the EU and the UK.

This could be made even worse if central banks raise rates in response to inflationary pressures and business investment weakens.

8 July 2018 – Manufacturing takes a hit once again, as Dutch electronics giant Philips admit that a hard brexit and loss of access to single market could force the organisation to move its production facilities out of the UK.

12 July 2018 – UK Services sector performs better in May, boosted by the warm weather and Royal wedding. Retail sales have performed better.

Global investors have been rattled after a threat by the Trump administration to impose 10% duties on $200bn (£151bn) of imports prompted protests from Beijing and brought an all-out trade war a step closer.

Stock markets headed lower in the US, Asia and Europe on Wednesday as the US warned that it would press ahead with further tariffs and China promised to “fight back as usual” with “firm and forceful measures” if they were enacted.

13 July 2018 – US inflation rises to 2.9%, outpacing real wages which grew at 2.7%. This, combined with the increased inflationary pressures that a trade war will bring on consumers, is likely to lend itself well to a proposed rate hike in August and at least two by the end of the year.

One consequence of these trade tariffs for the US is the resultant impact on the manufacturing sector. Making steel and aluminium exports expensive for foreign customers, drives down demand and results in an increase in domestic supply. With higher domestic supply, prices will be forced to drop locally and this could have an impact on business profits, business investment and employment within the sector.

 

Brent Crude Oil

 

 

 

 

 

 

  • Oil dipped at end of Jan as soaring North American production was seen undermining efforts led by OPEC and Russia to tighten supplies
  • At the beginning of February, investors, worried about proposed interest rate rises, began pulling money out of risky stocks and putting cash into the dollar. As the dollar rose, this drove down the price and attractiveness of oil.
  • Mid-Feb, the US cuts back on production but towards end of month – production in US rises again
  • From March to May, the rally was being driven by looming U.S. sanctions against major oil producer and OPEC-member Iran, which produces around 4 percent of global oil supplies.
    President Donald Trump’s decision to pull the U.S. out of the Iran nuclear deal will curb exports out of the Middle Eastern country, by as little as 200,000 barrels per day (bpd).
    The sanctions will be taking place at a time when OPEC-led production cuts have already tightened the supply situation, with noteworthy efforts from Russia and Saudi Arabia.Additionally, global inventories have tightened amid strong demand from Asia.
    Global oil supply is being squeezed right now by worsening economic conditions in Venezuela (a member of OPEC) that has consistently produced less output over the past two years. Venezuela is one of the most corrupt nations in the world, and the U.S. plans to hit back with steep oil sanctions
    Speculators are betting heavily that the sanctions will lead to supply disruptions that will make crude oil an attractive enough asset to drive prices to $80 -$100 per barrel later this year.On the bearish side some traders believe prices won’t move nearly as high because of rising U.S. production and the possibility that other suppliers from within OPEC will step up output in order to counter the Iran disruption. This would essentially end the OPEC-led deal to trim production.
  • Soaring oil prices caused OPEC to revise its strategy in June and ramp up its oil production by 1m barrels per day. US are also increasing production.
    Increasingly clear that Saudi Arabia and Russia will struggle to compensate for potential losses in oil production from the likes of Venezuela, Iran and Libya, which is keeping prices up.
  • At the start of July, four Libya oil ports closed amid corruption allegations.
    US output has slowed.
    The United States says it wants to reduce oil exports from Iran, the world’s fifth-biggest producer, to zero by November, which would oblige other big producers to pump more.
    Hundreds of workers on Norwegian offshore oil and gas rigs went on strike after rejecting a proposed wage deal, leading to the shutdown of one Shell-operated field and helping send Brent crude prices higher.

 

Gold 

Sentiment for gold has been bearish this year, despite being a safe haven asset and one that would be expected to be more attractive to investors bearing in mind global trade uncertainties, Brexit, etc.

The issue, is that the prospect of higher interest rates and a rising dollar has had a negative impact on gold since it is priced in the greenback currency, thus making gold more expensive for overseas consumers.

Concerns about the health of China’s economy as it locks horns with the U.S. also could be weighing on gold. Industrial metals, for example, of which Beijing are big buyers, have been tanking and gold may be swept up in that wave.

 

Sources;

TradingEconomics.com
FT.com
Bloomberg
The Guardian – Economics
Oilprice.com
Forbes.com
Marketwatch.com

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