As the general election campaigns kicked off in the UK this week, the main economic focus was on progress on a trade agreement between China and the US - reports have raised hopes that a deal between the two nations could be struck as soon as next month. Gao Feng of China’s Commerce Ministry told reporters on Thursday that negotiators from both sides had agreed “to remove some of the additional tariffs in phases”.
On Tuesday there were reports that the US was contemplating removing 15% tariffs on $112bn of Chinese goods that were introduced in September. Removal of tariffs is a key obstacle to solid progress in talks to resolve the dispute be-tween the two nations, and suggestions that the US was willing to compromise could indicate that President Trump and Chinese Premier Xi Jinping are aiming to establish a broader and longer-term agreement. Trump certainly wants some progress ahead of his election campaign next year.
There was more disappointing news on the UK economy, however. The key UK services sector, which accounts for about 80% of UK GDP, has started to flatline, according to data out this week. The IHS Markit CIPS UK Services PMI edged up to a reading of 50 in October, from 49.5 in September. While technically a marginal improvement, it remains one of the weakest readings in the past 10 years. Also released this week were purchasing managers’ indices for the UK’s construction and manufacturing sectors. Construction was particularly weak, with the sector’s PMI, also compiled by IHS Markit, reading just 44.2; up from September’s 43.3 reading, but still well below the 50 level that separates ex-pansion from contraction. Housebuilding saw the sharpest drop in three years while commercial construction fell for the 10th consecutive month. The Markit/CIPS Manufacturing PMI index rose to 49.6 from 48.3 in September - a six-month high. The result was boosted by stockpiling ahead of the October 31 Brexit deadline, but even then remained under 50, firmly in contraction territory. Overall, the IHS Markit CIPS All-Sector Output Index – which combines all the sectors to-gether - rose to 49.5 in October from 48.8 in September. The reading has now been in contraction territory for three months.
On the continent, the eurozone economy is faring little better. The IHS Markit Composite PMI for the eurozone read 50.6 in October, marginally up from the 50.1 reading in September but still one of the weakest in more than six years. Manu-facturing was worst hit, suffering its ninth consecutive month of contraction, battered by Brexit and slowing global trade due to the US/China trade war. France produced the highest composite PMI reading, at 52.6, but Germany’s was the weakest at 48.9, underscoring worries of a recession in the region’s largest economy. In the US, its giant services sector rebounded from a three-year low in October, alleviating immediate fears that its slump in manufacturing is spreading to the broader economy. There was better news on UK retail sales in October. According to the British Retail Consortium (BRC), total sales were up by 0.6% in October, the best performance since April. The upturn was attributed to stores of-fering big discounts. On Thursday the Bank of England held interest rates steady at 0.75%, although two of the nine committee members voted for an immediate 0.25% cut to offset Brexit uncertainties and signs that the labour market was weakening.
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