UK: Weaker Growth - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the UK economy
has collected a hefty helping of nasty headlines this week.
Key Quotes
“First
came yesterday’s news that the March trade deficit was the biggest
since 2008 and that the deficit with the EU was the largest on record.
Then came today’s realisation that UK March factory output has
registered its biggest fall since 2013. Manufacturing output fell by a
shocking -1.9% y/y.
Although the weight of current UK economic
data releases are still referring to Q1, the indications from figures
referring to the early stages of Q2 offer no comfort. These included the
softer expected GfK consumer confidence and CBI business optimism
surveys in addition to the Markit/CIPS PMI surveys of manufacturing,
construction and the services sector - all of which undershot market
expectations. According to the April PMI surveys, the manufacturing
sector in the UK is now contracting while the pace of expansion in the
much larger services sector has shifted into a lower gear.
Tomorrow’s
release of the May Inflation Report gives the BoE the opportunity to
give recent weak economic data releases some more context. The Bank’s
current projections for GDP growth are well above those in the market.
Given the recent spate of soft data releases, there seems to be a strong
chance that the BoE may revise down its projections for economic
activity in its May Inflation Report.
The Bank’s job tomorrow is
complicated further by uncertainty related to the June 23 referendum on
EU membership. BoE Governor Carney has previously warned that a Brexit
was the greatest domestic risk facing the UK economy. Since Brexit
uncertainty will may be adding to the headwinds to growth, we see risk
of a dovish leaning in the Inflation Report tomorrow. Insofar as the
market is already pricing in a greater risk of rate cut than a rate hike
into next year, this should not surprise the market significantly.
However, we see scope for some negative reaction in the pound
near-term.”
