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UK economy contracts in April as car production slumps

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There were mixed signals from the UK economy this week. On Monday, data from the Office for National Statistics (ONS) showed that in April GDP growth shrank by 0.4% month on month, a far worse performance than expected by analysts, who had forecast a drop of 0.1%. The fall is the second consecutive monthly contraction, following a 0.1% drop in GDP growth in March. However, there was good news on Tuesday as the ONS revealed that pay growth is accel-erating, boosting household finances, while unemployment remained at a 45-year low of 3.8%.

The disappointing economic growth data, again from the ONS, was blamed on a dramatic slump in car production and other “temporary factors” related to Brexit and its original March deadline. In the first few months of the year, economic growth was boosted as manufacturers built up supplies in case of a no-deal Brexit on March 31, leading to an unusually large burst of activity. As that effect wore off and the Brexit deadline was moved to October 31, activity slumped. Indus-trial production declined by 2.7% in April compared to March and manufacturing output fell by 3.9%, representing the sharpest fall since 2002. The standout contributor to the fall, however, was a sharp reduction in the number of cars pro-duced in the UK. Car manufacturers had brought forward their annual factory shutdowns from August to April to minimise the impact of a no-deal Brexit. Car production fell by 24% in April compared to March, the biggest fall in 24 years. Meanwhile, wages continue to grow above expectations, with wages between February and April 3.4% higher than a year earlier. According to the ONS, after adjusting for inflation, wages grew by 1.5%.

While the unemployment rate held steady, the number of people in work actually increased by 32,000 over the quarter, taking the total of employed people in the UK to 32.75m. The rise was driven primarily by an increase in the number of women in the workforce to a record 15.46m.
The overall decline in activity in the UK property market abated in May, according to a survey by the Royal Institution of Chartered Surveyors (RICS). New buyer enquiries levelled off rather than declined in May - the first time since July 2018 that new buyer enquiries did not decline. The RICS added that the negative trend in agreed sales, new instructions and prices had “diminished to a certain degree”. However, agreed sales continued to slide in May and most respondents did not expect the market to improve in the short term. On Wednesday, Donald Trump ramped up trade fears once again as he said he may impose tariffs on an additional $325billion of Chinese goods, but he gave no deadline for the escalation and said that he felt that China wanted to make a deal, without providing further details.

On a global view, interest rates look set to stay lower for longer as weak inflation is now established as a global phe-nomenon. At the beginning of the year, the consensus view was that central banks would continue withdrawing their easy money policies and raising interest rates. However, May data for inflation showed falling core inflation rates in the US, China, the Eurozone, India, South Korea and Thailand. All of these factors add to the prospect of interest rates and bond yields staying lower for longer.

 

 


 

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