Pound falls as macro data disappoints

The pound was trading at $1.29, a drop of 0.7 of a cent, or 0.4 percent on Friday. It also hit a nine-day low of 88.35 pence per euro, down 0.3 percent.

A year after the Brexit vote, the Uk currency is down by around 13.7 percent against the euro and there is little to indicate that the UK economy is rebalancing away from consumer spending and towards exports, as policy makers have hoped.

An indication of this is a fall in the savings ratio to an historic low of 1.7 percent in the first quarter of the year, possibly implying that households are reducing their savings to mitigate the effects of falling real incomes on consumption as inflation rises.

De facto devaluation

Earlier depreciation has not fed into a significant reduction in the trade deficit. The deficit widened by £2 billion (euro 2.4 billion) in the second quarter, mainly due to high imports especially from outside the EU.

It now remains to be seen if an even weaker pound can boost exports enough to offset consumer slowdown.

That seems unlikely.

Some believe the reason for this is that the UK's high-value added exports are seen as less price-sensitive. Other blame manufacturers for hiking their prices since the pound fell, rather than trying to grow their market share, blunting any competitiveness dividend from the weak pound – perhaps the main reason opponents of the Eurozone criticize the common currency.

New car sales in the UK went into reverse for a third month in June. In the second quarter overall, new car sales fell by 10.3 percent, the biggest quarterly drop in more than six years.

The slowdown in recent months follows five years of growth in new car sales, which has helped to underpin consumer-led growth in the wider economy.

Brexit adds to the mix

On Thursday, the EU's chief negotiator Michel Barnier told an EU committee in Brussels: "I have heard some people in the UK argue that one can leave the single market and keep all of its benefits - that is not possible."

The euro has been buoyed by improving fundamentals and the sense that politically it has turned a corner after elections in France.

Another driver for the single currency was yesterday's announcement of the Japan-EU Free Trade Deal.

To make Brexit matters more complex for the UK, the CBI, the UK's association of business leaders, said on Thursday that Britain and the EU should agree a Brexit transitional period that would allow the UK to protect jobs and investment.

GDP

Today's data suggest that the economy grew only 0.3 percent in the second quarter, which would be slightly better than the 0.2 percent growth posted in the first quarter but still the weakest of any G7 nation.

The NIESR thinktank has estimated the economy grew 0.3% in the second quarter, below the 0.6% trend growth rate.

The lack of clarity about future trading relationship with the EU - exacerbated by the general election result in June - is not helping the manufacturing sector.

Over the past decade at constant prices UK output is only about 12 percent larger, with an increase in population from 61m to 65m – per capita that is growth of only 5 percent.
 

Interest rates

Most now a UK interest rate hike as almost certain to be delayed until 2018. "With the April industrial production and construction weak, now may turn out not to have been the best time for some of the MPC to have turned hawkish," RBC Capital Markets strategists wrote in a note before the data.

A decade on from the last UK rate rise, traders are again expecting the Bank of England to move, the Financial Times reports.

For bond market investors the FT notes, the question is whether the BoE should move back from the emergency interest rate of 0.25 percent imposed after the UK voted to leave the EU, to a merely extraordinary setting of 0.5 percent.

London's benchmark FTSE 100 was 0.2-percent lower on Friday, also following the economic data.

jbh (Reuters, AFP)