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UK Economic Update – 11 May 2015

General election result is good news for both markets & the economy over the near – medium term

The headline event over the last week in the UK and Europe was without doubt the general election in Britain, where the Tory party surprised almost all observers when it swept to victory with an absolute majority.

Although on the plus side for the economy we can say that the UK has avoided the stewardship of a profligate Labour government for at least another five years, Thursday’s result does now open the door to market jitters over the potential outcome of a referendum on the EU in 2017.

Nevertheless, for now markets appear to have taken comfort from the news of a Tory victory, with sterling up by more than 200 ticks against the US dollar and the FTSE 100 now pushing back toward its previous record high.

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Recent UK economic data suggests that growth remained moribund during the opening of Q2

Manufacturing PMI posted its second lowest reading since June 2013 on 01 May while the Construction PMI also surprised on the downside. The only bright spot in recent economic data has been the Services PMI, which continued to point toward healthy levels of expansion within the sector.

The disappointing performance in terms of economic data is not an isolated incident at present as both the European and North American economies also appear to have embarked upon a downturn during the recent weeks.

This is while the UK and US economies have exhibited persistent signs of weakness throughout the year to date.

At present it seems that central bankers are happy to write off the economic weakness as a mere blip in the broader recovery, given what was a strong run of growth between the close of Q1 and the opening of Q4 in 2014.

However, if we do not see an upturn in economic barometers throughout the course of the next six weeks then it wouldn’t be difficult to imagine a scenario ensuing where policy makers begin to sound more dovish and markets begin to make further revisions to their expectations for initial rate hikes from the MPC and the FOMC.

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Employment and earnings data for April will be important, but not the be all and end all

The headline events for this week are likely to be the release of the BOE quarterly inflation report, where Mark Carney is expected to sound more upbeat on the outlook for inflation, followed by the release of April unemployment and average earnings figures.

In terms of inflation we expect the Governor of the Bank of England to note the recent recovery in oil prices before sounding a more upbeat tone when it comes to the forward outlook for inflation. This may not be the most positive thing for wage earners although it is likely to embolden interest rate hawks, potentially adding fuel to the fire under sterling’s recent recovery.

On unemployment and average earnings we note that official projections suggest that incomes in the UK grew, on average, at a solid rate of 1.7% during the previous month. This is while the unemployment rate is also projected to have fallen further from 5.6%, down to 5.4% during the same period.

We think that investors should not be too surprised if either of these numbers disappoints on Wednesday given the level of uncertainty that was cast over the economy in the run up to the election.

However, having said this, a surprise on the downside would not be the end of the world as expectations for the economy are now much brighter given the Tory victory last week.

FTSE 100 / Hourly Intervals

FTSEMAY

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