28 July 2016


Economic update

Our regular roundup of the key economic indicators.

Economic update

The ITS showed that the manufacturing sector continued to recover in the quarter to July, but output growth is expected to slow sharply in the quarter ahead. Meanwhile, optimism among the UK’s manufacturers fell at its fastest pace since the financial crisis. However, there were signs of a boost to export competitiveness from weaker sterling with export orders expected to rise at an above average pace over the next quarter and competitiveness in EU and non-EU markets judged to have risen at its fastest pace since 2010. More than half of exporters were concerned that economic and political conditions abroad could constrain exports orders over the quarter ahead – the highest since 1983.

Retailers in the DTS reported that sales fell in the year to July while expectations for the year to August were at their weakest since January 2012. Orders placed on suppliers fell at a faster pace than expected and retailers expect to continue to cut orders next month.

Labour market statistics revealed that the number of people in employment increased by 176,000 in the three months to May, the largest rise since the end of 2015. The number of people unemployed also fell (-54,000) causing the unemployment rate to edge lower to 4.9%, the lowest rate since July-September 2005. However, pay growth remained subdued despite the introduction of the National Living Wage in April. Annual growth in regular pay (excluding bonuses) in the private sector grew by 2.4% in the three months to May, unchanged from April.

GfK released a special version of their Consumer Confidence Barometer (CCB) to measure post-referendum sentiment. The July survey showed the largest decline in consumer confidence since 1994 driven primarily by concerns over the economic outlook in the year ahead. 60% of respondents expect the general economic situation to worsen over the next 12 months, up from 46% in June. Additionally, the number of people who expect prices to increase rapidly over the next year has increased to 33%, a sharp rise from 13% in June.

Markit/CIPS released an early flash composite PMI for July which fell to 47.7 in July (from 52.4 in June). This was the lowest reading since April 2009 which firms linked to the ongoing uncertainty pre- and post-EU referendum, with reports especially prevalent among service providers. Both the services and manufacturing PMIs fell into contractionary territory, with the downturn more marked in the services sector, where activity and new orders fell at the fastest pace in over seven years.

A Deloitte CFO survey revealed that sentiment among CFOs fell at the fastest pace since the survey’s inception in 2007. 58% expected their capital spending to be lower and 66% expected hiring to be lower over the next three years.

UK Q2 GDP rose by a sturdy 0.6% in the run up to the EU referendum according to the ONS preliminary estimate, above consensus expectations (0.5%). Growth was generally broad-based by sector, with a notable rise in manufacturing output – the fastest in six years. All major sectors followed a pattern where growth surged in April and was more tepid in May. While this could be interpreted as a sign of uncertainty ahead of the referendum, the ONS noted that few respondents reported this to be the case.

Core retail sales (excluding automotive fuel) declined by 0.9% month on month in June, a weaker reading than consensus expectations (-0.6%), following a rise of 0.9% in May. Annual retail volumes saw a similar trend with growth slowing to 4.0% in June from 5.2% in May. The weakness in growth was broad based across both sub-sectors.

CPI inflation edged higher in June, rising by 0.5% over the year, up from 0.3% in May. This beat both consensus (0.4%) and our own expectations (0.3%). The main upward pressures came from higher air fares and fuel prices. The core CPI rate which excludes food and fuel components reinforced this upward trend with prices rising by 1.4% in June from 1.2% in May.

For more information please contact alepsh.paleja@cbi.org.uk