Given the almost endless stream of data points, it can sometimes prove difficult to keep track of just how the UK economy is doing, especially in the aftermath of the EU Referendum. Sooo…building on one of our blogs from the summer, we’ve picked out 6 key indicators which will give you a good overview of what’s happened in the economy and the manufacturing sector.
We’ll kick things off with the manufacturing PMI, given the latest monthly instalment was released this morning.
1) Manufacturing PMI rooted in positive territory
The Manufacturing PMI, following a slump in July 2016, has been rooted in positive territory ever since. Indeed October’s reading today of 56.3 represents the 15th consecutive month of expansion, and is well above the long run average of 51.7, indicating that manufacturing is in fairly rude health.
2) And the economy on the whole has performed reasonably well
The UK economy defied expectation in the immediate aftermath of the Brexit vote, powering through to post solid GDP growth of 0.4% and 0.6% in 2016q3 and 2016q4 respectively. Since the turn of the year however, the economy has slowed, as rising inflation and weak wage growth squeeze consumers. Manufacturing also had a weak q2, due in no small part to poor motor vehicle production.
Last week however, the first estimate for q3 exceeded expectations, coming in at 0.4%, with manufacturing in particular getting back on track with a healthy expansion of 1%. While the economy is not firing on all cylinders, and lags behind its G7 counterparts, this was some welcome news.
3) Exports up…but so are imports
While sterling’s depreciation has provided a boost to exports, further supporting the strong global demand we are seeing across key export markets, its flipside of rising input costs has meant that the value of imports have risen at broadly the same pace. (The opposing effects to manufacturers of a weak currency is something we have been saying for some time).
As a result the UK’s trade balance remains broadly at the same level as it was pre Referendum, despite the good news about exports.
4) Inflation, inflation, inflation
Perhaps the key economic indicator (or most talked about anyway) over the last year or so has been inflation. On the back of the sustained depreciation in sterling, the CPI has been steadily climbing, and in September broke the 3% barrier. The rise in inflation to well above the Bank’s target of 2%, combined with weak wage growth (see next point) is hitting consumers, as well as increasing the pressure on the MPC to raise rates. Stay tuned tomorrow for Lee’s blog on the MPC’s much anticipated decision.
5) The wage puzzle continues…to well puzzle
On the back of the economy performing relatively well, unemployment has fallen. In fact the current unemployment rate – 4.3% - is its lowest level for 42 years. Given this, conventional economic theory says wages should rise, as the labour market tightens and workers bargaining powers increases. This has not yet materialised, with wage growth significantly lagging behind inflation, resulting in negative real wage growth for the last 5 months. Explanations for this range from weak productivity growth, to a broken Phillips curve, and yes you guessed it Brexit uncertainty. However no universal explanation is evident.
There have been some very tentative signs recently that wages are beginning to rise, and this will be a key factor we will be keeping our eye on in the Bank’s inflation report tomorrow.
6) Future profile of investment is finely balanced
Business investment has not collapsed as many predicted post-Referendum (and has actually picked up over the last few quarters), but it has not performed as well as one would expect given the global climate.
Our own Investment Monitor 2017/18 shone a spotlight on future investment intentions, illustrating how finely balanced the current state of affairs is – with Brexit uncertainty and barriers to automation both at play.