Article / 28 July 2016 at 11:00 GMT

The UK must not be misled by Q2 data

Managing Partner / Spotlight Group
United Kingdom
  • Industrial production in the UK booked its biggest gain since 1999
  • Services, which account for 79% of the economy, saw growth slow 
  • The UK is not really entering the post-Brexit world from a position of strength
  • Labour does neither seem to be able to offer better prospects for the UK
  • The cold shock of a recession may be just around the corner.
UK farm
"Yesterday, all my troubles seemed so far away," the Beatles sung. 
What the UK needs now might rather be a "bridge over troubled waters". Photo: iStock  

By Stephen Pope

The Office for National Statistics reported that the UK’s economy advanced 0.6% quarter-on-quarter during Q2 2016. This was higher than the previous period's  0.4% expansion and ahead of market expectations of 0.4%.
UK Growth Source: Office for National Statistics 

Leading the way in the data detail was industrial production which rebounded by 2.2% in April, 1.4% in May and almost 2.7% in June to grow at 2.1% so booking the biggest gain since 1999. This was marked by solid increases in the mining, quarrying, and manufacturing sectors.

In contrast, services, which account for 79% of the economy, saw growth slow and construction shrank during Q2.

Use the windscreen not the rear view mirror

Now before the government starts beating the UK drum too loudly, it has to be recognised that within the Q2 data the best growth came in April. This was followed by a general tapering of activity during May and June as concern over the outcome of the UK referendum regarding the European Union mounted.

So when the chancellor, Phillip Hammond, says that the UK is entering the post-Brexit world from a position of strength it is fair to say that he is being a little generous with his sunny and optimistic forecast.

However, he then diluted the enthusiasm by telling the BBC that with regard to the referendum result it was: "far too early to say how the economy is responding"

Maybe we have to cut the chancellor a little slack as ONS chief economist Joe Grice said that as well as the industrial gains, there was also:

"strong growth across the services sector, particularly retailing... Any uncertainties in the run-up to the referendum seem to have had a limited effect...Very few respondents to ONS surveys cited such uncertainties as negatively impacting their businesses."

No vision from Labour’s left-wing lament

For the Labour Party, being able to pour cold water on this data set must be a welcome relief from their shambles of a leadership contest.

John McDonnell, Labour's shadow chancellor and a committed socialist looked to the situation of the working class as he said the GDP data had very little relation to the actual economic position of ordinary working people.

"Today's GDP figures provide a stark contrast with the grim news on real earnings which remain 10% below their 2007 level...The Tories' failed austerity policy has produced a lost decade for earnings with ordinary households experiencing the worst decline in living standards in living memory."
UK wages Source: Office for National Statistics, Spotlight Ideas

The chart above indicates that the shadow chancellor is not using the data correctly, or has a short memory as in the 14-months since the last general election in the UK the average level of UK weekly wage growth is running at 89% of that seen in the last seven years of the Labour administration that was led by Tony Blair and then Gordon Brown. It has improved on the average during the Conservative/Liberal Democrat coalition.

If one really wants to know how well wages would be for the ordinary working population under a potential Labour government, just look at French data. 

After 50-months of Socialist rule, wages in France gained just 0.2% during Q4 2015. They have been in steady decline since François Hollande replaced Nicolas Sarkozy as president. Under Hollande the average is 0.43% cf. an average of 0.61% under Sarkozy.

One cannot support workers’ wages if one does not support business.

What should be even more frightening is that the Labour party still seem incapable of offering the country a serious political opposition. In the current leader one is offered protest but no leadership and in the challenger, Owen Smith, a more polished performance still based on more debt, wealth taxes and wage councils. 

Politicians tried in the 1970s when the UK ended up broke, having to borrow from the International Monetary Fund.

Wages in France are not really growing. Photo: iStock
Around the corner a slowdown is waiting

I said that for the UK economy the service sector accounts for something like 79% of the UK’s GDP. It is therefore rather worrying to note that the headline Markit Flash UK Services PMI Activity Index fell sharply to 47.4 in July 2016 from 52.3 in June, below market expectations of 48.9, as the sector was hit by the vote to leave the European Union.

It was the first contraction since December 2012 and the steepest fall since March 2009, as output and new orders dropped at the quickest rates in over seven years and employment in the sector fell slightly for the first time since December 2012. Meanwhile, service providers’ optimism about the coming 12 months slumped to a 90-month low.

Meanwhile, industrial output, including manufacturing, grew by 2.1% in Q2, headline Markit Flash UK Manufacturing PMI came in at 49.1 in July 2016, lower than 52.1 in the previous month but better than market expectations of 47.8. It was the weakest reading since March 2013, as output and new orders both dropped for the first times since the opening quarter of 2013.

The Confederation of British Industry order book balance decreased to minus 4 in July 2016 from minus 2 in the previous month, but better than market consensus of minus 6. Output expectations (6 from 23 in June), stocks of finished goods (8 from 10) and export orders (minus 22 from minus 14) fell while domestic price expectations (5 from 1) went up. 

Meanwhile, optimism among UK’s manufacturers fell sharply to minus 47 from minus 5 in June, hitting its lowest level since April 2009, as British decision to leave the European Union weighed on sentiment.

Clearly the months ahead are going see the workload piled high for the chancellor and his cabinet colleagues charged with managing Brexit and securing new overseas trade orders.
Care does need to be taken with these figures as they an initial take on the economic picture and only capture one week of post referendum Britain. 

The cold shivers of winter may seem far off in July, however, the cold shock of a recession may be just around the corner.

— Edited by Clemens Bomsdorf

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.
02 August
vanita vanita
Dear Stephen,
It's time to buy dax sell- ftse?
03 August
Stephen Pope Stephen Pope
I cannot recommend that strategy as from a technical perspective I see the following pattern:

1 Min to 1 Hour Strong Sell ... 5 Hours Sell ... Daily Neutral ... Weekly Strong Buy ... Monthly Buy

1 Min Neutral ... 5 Minutes to 5 Hours Strong Sell ... Daily Neutral ... Weekly to Monthly Strong Buy

So both indices have similar technical profiles, with a slight edge in favour of FTSE.

Looking in detail at both indices and their charts they have both endured a corrective wave. There was an element of recovery, however, both fell short of the technical rebound target.

DAX: Corrective from 12298 to 8969 and rebound stopped at 10121, a level tested on Dec 1 2014 and Sep 7 2015. This was short of the 38.2% retracement at 10240. Therefore risk is now to 9730...chance of a pause at 9930.

FTSE: the corrective ran from 7077 to 5703 and the rebound faded at 6719. this was shy of the 76.4% retracement at 6752. So FTSE risk to 6552.
03 August
Stephen Pope Stephen Pope
I may look at these two indices for a Trade Comment.
03 August
vanita vanita
Thanks Steve once again.
Take care Steve and your family.


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