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.
“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.”