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UK economy disappoints while Fed hints at US rate cuts

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It has been a week of largely disappointing economic data in many major markets. In the UK, surveys measuring three key sectors showed the UK economy struggling for traction against the headwinds of Brexit worries and ongoing global trade disputes.

In the US, the Federal Reserve indicated it may cut interest rates this year in response to an anticipated deterioration in the US economy, while in Europe, the European Central Bank (ECB) suggested on Thursday it could cut rates and restart its quantitative easing programme to boost growth after it reported worryingly low inflation data for the Eurozone.

The week started with the IHS Markit Purchasing Managers’ Index (PMI) for the UK manufacturing sector producing a reading of just 49.4 in May, the worst performance in nearly three years and below the crucial 50 figure that distinguishes expansion from contraction. New orders and employment in the sector both fell. The performance was blamed on weak demand, trade tensions and the dispersal of large inventories built up ahead of the original Brexit deadline in March.

On Tuesday, IHS Markit released its construction sector survey. The reading fell to 48.6 in May, down from 50.5 in April. It was the worst performance in more than a year, with commercial building the worst-hit sub-sector. The housebuilding industry, usually a strong performer, barely expanded, while employment within the industry as a whole suffered its big-gest drop in more than six years.

Finally, the UK services sector, which accounts for around 80% of UK GDP, expanded faster than expected in May, alt-hough its performance was still subdued. The IHS Markit PMI for services produced a reading of 51 in May, up from 50.4 in April. Taken together, the surveys show the UK economy is struggling to grow. Chris Williamson, chief economist at IHS Markit, said: “The PMI surveys collectively indicated that the UK economy remained close to stagnation midway through the second quarter, registering one of the weakest performances since 2012."

Retail sales also suffered in May, with the British Retail Consortium (BRC) reporting a fall at the fastest rate since 1995 – when their records began. In its accompanying statement it warned of further shop closures and job losses.
Sales fell by 2.7% in May compared to the same month last year. However, analysts warned that the fall should be seen in context: in May 2018, a royal wedding and unusually good weather helped boost retail spending by 4.1%, in itself a record, and the data has been distorted by the timing of Easter this year. Compared to such a strong baseline perfor-mance last year, this year’s drop appears particularly dramatic. Samuel Tombs of Pantheon Macroeconomics urged ana-lysts to put the fall in context and pointed to a recent survey that showed UK consumer confidence at its highest level since last September and wage growth still exceeding inflation. He suggested that May’s relatively poor performance may be not be representative of the current state of consumer sentiment.

 

 


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