GDP growth slows in q1 - Construction output slumps ...

According to the ONS preliminary estimate of GDP, the UK economy grew by 2.4% in the first three months of the year. The growth rate in the prior quarter was 2.9%.

A slow down in manufacturing output growth to just 1.3% was largely to blame, along with a slump in construction output, down by almost 1%. Service sector growth maintained the momentum, up 3.0% with strong growth in leisure and business services.

Private service sector growth increased at a rate of 3.9%. The tale of two economies continues. Strong growth in output, jobs and inflation in the (private) service sector is at odds with slow growth in manufacturing and an inexplicable fall in construction output.

Has this changed our outlook for the year? Not yet. We still expect the UK economy to grow by 2.9% this year, despite the apparent disappointing performance in the first three months.

Some revision is possible in the construction data in the later estimates of GDP growth to follow this month. For the moment we do not expect to make any major revisions in the full forecast review out in May. We still expect growth of almost 3% for the year as a whole. Can we be so confident about the manufacturing forecasts? Well we were expecting growth of just 2.5% for the year as a whole, so not much is at risk.

Markit/CIPS  Purchasing Manager’s  Index® (PMI ®)
The latest Markit/CIPS survey data for April didn’t help over much. April saw a marked slowdown in the rate of  UK  manufacturing  expansion. Output rose at the weakest pace since November last year.  The  seasonally  adjusted  Markit/CIPS  Purchasing  Manager’s  Index ® posted 51.9 in April, below the March reading of 54.0 (originally 54.4).  

So what’s happening in manufacturing? Last week, we touched on car production. In the first three months of the year, UK car output fell by 0.6% compared to last year. Strange when you think European car sales were up by 8.6% in the first three months of the year and UK car sales were up by 6.8%.

Car production is an international syndication process. The data suggests a model shift out of the UK into Europe perhaps. Fears of Brexit or Currency trends? We can’t be sure but something strange is going on. It’s not the march of the makers, that’s for sure!

[Data from ACEA European Automobile Manufacturers Association and SMMT UK Society of Motor Manufacturers and Traders.]

So what’s happening in the US?
The first estimate of GDP in Q1 USA suggested a slow down in the economy. The US economy "all but stagnated" in the first three months of the year according to the BBC, growing at an annual rate of just 0.2%, official figures show. It was said.

The Fed FOMC minutes released this week didn’t help. “Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months and in the first quarter”.

You have to wonder if anyone stops to check the data. The US process of taking the quarterly growth rate then annualising is totally misleading. Year on year, the US economy grew by 3% in the first quarter of the year compared to the first quarter of 2014.

In 2014, the growth rate in Q4 and for the year as a whole was 2.4%. Far from “slowing down” growth is accelerating. Earnings and inflation are showing signs of a rally. Job growth is increasing, we expect growth of 3% this year.

So what of rates?
Markets still believe the Fed will begin to increase rates in Q3 this year. June no longer the favourite. Once the Fed makes a move, the MPC will surely follow. The inflation outlook will look completely different by the end of the year as oil and commodity prices rally. The recovery in the US and Europe will continue! Gilt yields are moving up. We could be leaving Planet ZIRP before Christmas …. Buckle up!

So what happened to Sterling this week?
Sterling moved up against the Dollar to $1.518 from $1.514 but moved down against the Euro to €1.353 from €1.397. The Euro rallied against the Dollar at €1.122 from €1.083.

Oil Price Brent Crude closed at $66.07 from $64.94. The average price in April last year was $109.54. The deflationary push continues. Our forecasts of a $75 - $80 recovery by Q4 no longer so far fetched.

Markets, slipped below the magic marks. The Dow closed at 17,971 from 18,055 and the FTSE closed down at 6,988 from 7,071.

UK Ten year gilt yields moved up to 1.81 from 1.69. US Treasury yields moved up, to 2.07 from 1.96.

Gold slipped to $1,173 ($1,180).

That’s all for this week. Don’t miss The Big Social Media Conference in July and The Great Manchester Economics Conference in October. It’s a great line up for all events!

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