Sterling slides on growing no-deal Brexit risk
The pound has sold-off against the euro and the US dollar in the past month, with investors ramping up the sell orders after Boris Johnson entered Downing Street and stepped up the rhetoric over a no-deal Brexit. Sterling has fallen by more than 4% against the US dollar to trade below $1.22 and by almost 3% against the euro to about €1.09. The slide comes as many Britons head abroad on holiday, hitting them in the pocket. Economists also warn the price of importing goods to Britain will likely rise, pushing up inflation. The US investment bank Morgan Stanley expects the pound could fall to a range of $1-$1.10 if the UK exits the EU without a deal. That would threaten breaching the all-time low of $1.04 reached briefly in early 1985.
Stocks rise as US-China trade war cools
An easing in tensions between the US and China over trade has helped global equities markets to recover sharply over the past month, driving the FTSE 100 index of top UK companies to the highest levels this year. Expectations of major central banks cutting interest rates has also fuelled a sense of optimism in share dealing rooms. The weaker pound has also driven the FTSE 100 higher, as many firms in the blue-chip index make the bulk of their earnings in foreign currency. The FTSE 100 has risen by about 200 points in the past month to trade around 7,670.
Meets forecast
Inflation stays at Bank of England target
UK inflation remained at the Bank of England’s target for a second month running in June, helping British households to continue gradually rebuilding their finances. The Office for National Statistics said that the consumer prices index (CPI) measure of inflation was 2% in June, unchanged from the rate in May and in line with the expectations of City economists. The lack of inflationary pressure above the Bank’s 2% target rate, which is set by the government, will likely provide further reasons for Threadneedle Street to keep interest rates on hold. The central bank uses higher borrowing costs to contain inflation. However, the Bank has kept interest rates on hold amid steady inflation and heightened uncertainty over Brexit.
Better than forecast
End of stockpiling rush narrows trade deficit
Britain’s trade deficit with the rest of the world – measuring the gap between imports and exports – narrowed in May as companies reined in their stockpiling efforts. Firms had been rushing to place orders with overseas suppliers before the original 29 March Brexit deadline, pushing the UK trade deficit to the highest level on record as imports surged. However, with firms now having built up significant stockpiles, imports have slowed. Britain’s trade in goods deficit narrowed to £11.5bn in May, down from £12.7bn a month earlier. City economists had forecast a goods trade deficit of £12.6bn.
Worse than forecast
Business activity slumps on no-deal Brexit fears
The mounting risk of a no-deal Brexit caused business activity to stall last month, according to closely watched economic surveys, raising the spectre of the first drop in quarterly GDP in seven years in the three months to June. According to IHS Markit and the Chartered Institute of Procurement and Supply, activity in the construction and manufacturing sectors slid into reverse in June, while the UK’s dominant services sector was close to stalling point. Companies blamed the mounting risk of a no-deal Brexit in the autumn and weaker global economic growth, as the purchasing managers index for the services industry fell from 51.0 in May to 50.2 last month, just above the 50.0 mark that separates growth from contraction. Analysts warned that at that level GDP likely fell in the three months to June, marking the first quarterly drop since 2012. Official GDP figures for the second quarter are expected to be published on 9 August.
Better than forecast
Wage growth rises despite Brexit fears
British wages rose at the fastest pace for more than a decade as the UK jobs market continued to defy the broader slowdown in the economy as Brexit looms. Workers’ pay before bonuses in the three months to May rose by an annual 3.6%, the biggest rise since 2008. Including bonuses, pay rose by an annual 3.4%. Both metrics were higher than City economists’ forecasts. Despite the seemingly buoyant conditions in the jobs market, with unemployment remaining at the lowest levels since the 1970s, the official data picked up signs that the UK’s jobs boom is fading. Employment rose by just 28,000 in the latest quarter, below expectations.
Better than forecast
Retail sales unexpectedly rise
Demand for second-hand goods sold by charity shops and antiques auctions provided an unexpected boost for UK retail sales in June, in a positive signal for the economy. In a sign that consumers are continuing to take the heightened levels of political turmoil over Brexit in their stride, the volume of goods sold in May increased by 1% on the month. Sales were up on the same period last year by 3.8%, beating the forecasts of City economists. Economists said that rising wage growth and steady inflation had helped rebuild UK consumers’ spending power.
Worse than forecast
Johnson inherits worsening public finances
Government borrowing rose in June to the highest level in four years, in a signal that weaker economic growth is feeding through to the nation’s finances. In a reality check for Boris Johnson as he promises higher public spending and tax cuts, the shortfall between spending and tax receipts rose to £7.2bn last month from £3.3bn in the same month a year ago. City economists had forecast a June budget deficit of £3.9bn. The deterioration in the public finances comes as analysts warn that a no-deal Brexit could cause government borrowing to rise even further.
Better than forecast
Property market stages gradual recovery
The impact of Brexit uncertainty on the property market showed tentative signs of easing in June, as interest among buyers rose and sales increased. A gauge of house prices from the Royal Institution of Chartered Surveyors – which shows the difference between members reporting price rises and falls – improved to -1 in June from a revised level of -9 in May. Hitting the highest level since August last year and beating the forecasts of City economists, the barometer suggested that house prices are still falling in London and the south-east, but are rising across the rest of the UK.
And another thing we’ve learned this month … The UK could already be in recession
Even before Brexit has actually happened, the lack of clarity over the future and an increasing risk of a no-deal departure this autumn may have already pushed Britain into a recession. Sounding the alarm on the eve of Boris Johnson winning the Tory leadership race, the National Institute of Economic and Social Research (Niesr) warned there was a one-in-four chance the country was in recession. With the higher likelihood of a no-deal scenario under a Johnson premiership, growth has stalled in recent months, while business investment has faltered. Economists define recession as two consecutive quarters of falling GDP. While official figures are not expected to come until the autumn, NIESR said there was a significant risk there was a recession currently underway in the second and third quarters of 2019. The thinktank, which is Britain’s longest-established independent research institute, also warned that a no-deal Brexit could trigger an even sharper downturn in 2020. The worst of the damage could be offset by the Bank of England cutting interest rates and the Treasury raising public spending and cutting taxes. However, this would require the government to increase its borrowing levels, which would breach Tory commitments to cut the deficit.
