UK economy growing at its slowest pace

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 10th May 2016 20:14 EDT

The UK’s manufacturing sector unexpectedly shrank for the first time in three years in April. New orders dried up amid fears over slowing global growth and a potential Brexit from the European Union. The weak reading comes after recent data has suggested there have been nearly 20,000 job losses in the UK's manufacturing sector over the past three months. The UK’s construction PMI figure for April caused a slight weakness in the Pound. The figure was expected to come out slightly lower than the previous which was 54.2, with the expected figure being 54.0. However the actual figure which was released was far under expected, coming out at 52.0 showing a drastic slowdown in the expansion of the UK construction sector.

This week’s purchasing managers' index (PMI) data has indicated the UK economy could be growing at its slowest pace in three years which has raised serious concerns about the security of the economic recovery. The services PMI figure, which makes up four-fifths of the UK economy, completed the week’s triple-whammy of disappointing news following the disappointing manufacturing and constructions sectors earlier in the week.

UK Chancellor of the Exchequer George Osbourne has stated the plan by Brexit campaigners to quit Europe’s single market would be ‘catastrophic; for the economy, job, income and peoples’ livelihood.

A recent study released by Frontier Economics for London First showed a Brexit would depress wages nationwide and hit harder in London. The study showed EU membership has on average increased UK salaries by £1,800 with the boost to London incomes amounting to approximately £3,100 and also stating ‘throwing away our EU membership could harm exporters and would certainly make us less attractive to global companies seeking to invest in London’.

The US manufacturing sector lost some momentum last month after recovering in March. Manufacturers recorded another modest increase in overall new work at the start of the quarter, but the rate of expansion was the weakest since December 2015.

The number of Americans filing for unemployment benefits rose more than expected last week, posting the biggest gain in more than a year, but the markets didn’t react too much as the underlying trend continued to point to a strengthening labour market.

Key data released in the form of average hourly earnings, unemployment rate and the non-farm payroll. Average hourly earnings and unemployment rate both came out in line with expectation at 0.3% and 5.0% respectively, however the non-farm payroll figure was printed significantly worse than expectation at 160k against a previous of 208k.

Nevertheless, the dollar weakness was somewhat short-lived as the greenback was propped up by remarks from New York Fed President William Dudley stating it was reasonable to expect the US central bank will raise rates twice in 2016 despite the recent bout of poor key economic indicators.

Investors paid most attention to the Eurozone Gross Domestic Product figures for the first quarter of the year. Quarter-on-quarter GDP surprised on the upside, showing double the rate of growth on the previous quarter, reading 0.6% rather than the 0.4% forecast.

The European Commission cut its 2016 growth forecast for the euro zone economy. Growth was downgraded to 1.6% this year and 1.8% in 2017 versus previous numbers of 1.7% and 1.9% respectively.

Eurozone Markit Services PMI figure come in slightly lower than expected at 53.1. There were slight increases from individual countries including Spain, France and Italy. A large fall in the German figure didn’t bode well for the overall reading. The Retail Sales figure for March also disappointed coming out lower than the previous figure of 0.3% and lower that the expected -0.1% coming out at -0.5%.

Greek lawmakers are debating additional pension and income tax reforms that will be key to unlocking international aid as European creditors considered a proposal which includes such additional reforms. The bill which is part of a €5.4billion belt-tightening package will be put to vote before the Greece meets with Euro-area finance ministers to review the status of the bailout. As the delay weighs on the nation’s ability to meet debt payments in July, the IMF has said it would be open to disbursing a new loan that would be separate from the European bail out, however the IMF has questioned Greece’s ability to post a fiscal surplus before interest payments.

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