World Economy

UK Economy Slips Further

The trade deficit widened to £4.6 billion in June, defying predictions that it would fall to £2.5 billion, the biggest monthly deficit of the year so far. For the second quarter overall the deficit hit £8.9 billion
UK Economy Slips FurtherUK Economy Slips Further

The British economy is slowing down again, new estimates warn, as exports fail to live up to hopes that the weak pound would boost overseas sales, the National Institute of Economic and Social Research estimated on Thursday.

Britain's economy likely expanded 0.2% in the three months to July compared with quarterly growth of 0.3% in the second quarter, news outlets reported.

"The service sector, which was the main driver for economic growth in the second quarter, appears to have slowed," Amit Kara, head of UK macroeconomic forecasting at NIESR, said.

"We see a modest recovery in the second half of this year in response to strengthening global growth and a weaker currency, but on the flip side, consumer spending is likely to be weighed down by weak wage growth and investment spending held back by Brexit-related uncertainty."

Earlier on Thursday, official data showed a lackluster performance for manufacturing and trade in June, Reuters said.

Analysts had anticipated something of a recovery in June, setting the UK economy up for a stronger second half of the year. But the trade deficit widened to £4.6 billion ($5.97 billion) in June, defying predictions that it would fall to £2.5 billion. That is the biggest monthly deficit of the year so far. For the second quarter overall the deficit hit £8.9 billion.

Business surveys have indicated companies are experiencing a substantial rise in demand from overseas, with the weak pound making British goods more competitive. Stronger growth in the world economy was also predicted to boost exports. But that has not yet shown through in the official data.

Little Room for Optimism

One factor may be that rising import costs affect the raw materials and part-finished goods that UK factories buy from abroad, meaning they do not feel the full benefit of the weaker pound.

Economists studying the ‘core’ export data, which strips out erratic components and energy, see a little room for optimism.

“Monthly trade data can be highly erratic and the lower value of sterling does seem to be driving a firmer trend in ‘core’ volumes, up 7.3% (the past three months, compared with the same period a year ago) to EU economies and 5.1% to non-EU economies,” said David Page, senior economist at Axa Investment Managers.

“This suggests solid expansion in exports at around 18 month highs. However, neither suggest a significant surge consistent with the outsized boost to competitiveness that the Brexit-inspired-fall in sterling should have inspired. Surveys suggest that further expansion is ‘in the post’.  We remain concerned about the external sector’s capacity to respond to greater demand limiting the benefits of lower sterling.”

Construction output also fell by 0.1% on the months and 1.3% on the quarter, against a backdrop of weakness in the housing market and a reluctance on the part of firms to invest in new premises.

Britain's Nationwide Building Society said its profit fell 18% in the first quarter and the volume of mortgage lending dropped, although it reported strong growth in the number of current account customers.

Britain's second-biggest provider of mortgages posted underlying profit before tax of £301 million ($390.91 million) for the three months to end-June, down from £368 million in the same period a year ago. Last year's figure was boosted by a £100 million gain for the sale of its investment in Visa Europe.

Shoppers Go For Cheaper Goods

British firms are keeping a lid on pay and automating more production while some shoppers, faced with rising prices, are switching to cheaper products, the Bank of England said on Wednesday.

The findings came in a report from around the country that showed Brexit is hurting households, mainly though the weaker pound. Businesses serving British consumers are suffering compared with export-focused manufacturers, as the weaker exchange rate and higher inflation following last year’s vote to leave the EU feeds through the economy.

Last week BoE Gov. Mark Carney said Britain’s economy was suffering from uncertainty and higher prices caused by the referendum decision in June 2016, and the central bank cut its forecasts for future growth and wages.

The BoE forecast last week that economic growth would slow to 1.7% this year and 1.6% in 2018, while wages are seen rising by 2% and then 3%.

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