Pound gradually climbs despite Brexit uncertainty
The pound dropped the most in a day for the whole of 2018 as Theresa May gave an angry speech this month, after returning empty-handed from the latest round of EU talks in Salzburg. The prime minister warned both sides were at an impasse, triggering a decline of about 1.5% on the day. Despite the recent decline, sterling over the course of the past month as a whole has edged up on foreign exchanges as investors bet that a Brexit deal can be done. The pound remains more than 12% down against the dollar on the day before the EU referendum in June 2016.
Equities rattled by US-China trade dispute
A weak pound is usually good for the FTSE 100 – as many firms in the index of leading UK companies make much of their profits in foreign currencies – but share prices have been buffeted in recent weeks by renewed trade tensions between the US and China. There are also concerns about potential contagion for financial markets from crises in emerging markets, including Turkey and Argentina, which have seen rapid declines in their domestic currencies. The leading index of UK company shares has dropped by about 2% in the past month.
Worse than forecast
Inflation unexpectedly hits six-month high
The launch of more expensive new-season autumn clothes and the rising price of a range of other items, including package holidays and theatre tickets, caused a surprise jump in inflation last month. The Consumer Price Index increased to 2.7% in August from 2.5% a month earlier, confounding economists’ forecasts for a decline to 2.4%. Although some observers suggest the increase may be temporary, others worry that wages are only just rising faster than inflation to the detriment of living standards.
Better than forecast
Trade deficit unexpectedly narrows
The UK’s trade deficit – by how much imports exceed exports – narrowed slightly in July to one of the best monthly readings in 20 years, driven by stronger exports around the world. The trade in goods deficit shrank to £10bn from £10.7bn in June, confounding economists’ forecasts for a deficit of about £11.8bn. The overall UK trade deficit for goods and services fell by £1.4bn in the three months to July to reach £3.4bn. Over the past 12 months, however, exports and imports of goods to and from EU countries increased by more than those to and from non-EU countries.
Better than forecast
Services offset manufacturing slowdown
There were positive readings for the British economy from closely watched surveys of business activity, pointing towards stronger growth from the services sector despite a slowdown in manufacturing output. The latest snapshot from IHS Markit/CIPS purchasing managers’ index showed an increase for the service sector, which accounts for about 80% of the UK economy, from 53.5 to 54.3. Anything above 50 indicates expansion versus contraction. Despite better news from the service sector, manufacturing output dropped to 52.8 from 53.8 a month earlier. Construction also suffered a sharp contraction, from 55.8 to 52.9.
Better than forecast
Pay growth accelerates amid growing skills shortage
There were signs in the past month that the lowest levels of unemployment since the mid-1970s could finally be helping workers demand higher wages, with the rate of annual pay increases rising to the highest level for three years in the three months to July. The Office for National Statistics said regular pay rose by 2.9% compared with a year ago, up from 2.7% in the quarter to June, while total pay including bonuses picked up from 2.4% to 2.6%. The jobless rate stayed the same at 4%. However, there are mounting concerns over the growing numbers of job vacancies due to a slowdown in the number of EU workers coming to Britain, which firms warn could be made worse by a no-deal Brexit.
Better than forecast
Sales of household goods boost struggling high street
Consumers shrugged off the impact of higher inflation and prolonged their summer spending spree. The ONS found retail sales increased by 0.3% in August compared with July – confounding City predictions that consumers would retrench following the boost provided by the heatwave and the World Cup. Sales of food and drink and clothing did fall back after their weather-related surge, but this was offset by the strongest performance of the household goods sector in two years.
Worse than forecast
Worst August for public finances in three years
The UK budget deficit – the difference between government spending and tax income – unexpectedly widened in August, handing Philip Hammond bad news ahead of the autumn budget. Public sector net borrowing last month, excluding the nationalised banks, grew by £2.4bn to £6.8bn compared with August a year ago. City economists had forecast the deficit would fall by about £1bn. Borrowing for the year so far, however, remains on-track to see Britain record the strongest year for the public finances for 16 years. Alongside the promise to lift NHS spending by £20bn, the chancellor may still therefore have room for greater spending, although he is believed to be worried about the impact of a no-deal Brexit.
Meets forecast
House prices drop amid falling sales volumes
House prices fell slightly last month across the UK, driven by falling prices in London despite increasing valuations elsewhere. The latest reading from the Royal Institution of Chartered Surveyors house price index, measuring the balance of British surveyors expecting price rises against those forecasting a fall, fell to +2 in August from July’s six-month high of +4, meeting economists’ expectations. The RICS said sales volumes across the UK were the weakest in five months, while house prices fell in London. However, there was solid demand in Northern Ireland and southwest England.
And another thing we’ve learned this month … Trump’s trade war may harm post-Brexit trade deals
The growing likelihood of failure for Theresa May’s Chequers plan has given rise to a slew of counter proposals from leading Brexiters – calling for a no-deal and Britain to trade with the EU using WTO rules, while seeking free trade deals with the rest of the world. The outlook for world trade is, however, sharply deteriorating as the US slaps import tariffs on Chinese goods. Rising protectionism could make life difficult for the UK outside the EU, economists warn. The Swiss bank UBS estimates the cumulative impact of no-deal Brexit and America’s trade war with China would stand to reverse about 15 years of progress of reducing global trade tariffs. The very worst scenarios envisage the US imposing average tariffs at levels unseen since the 1940s.
