UK & US Economic Update – 02 June 2015
UK & US economic data remains mixed, begins to divide opinions on growth
The headline event in the UK and the US last week was the release of second estimate GDP figures for both economies, each of which prompted a mixture of surprise and disappointment.
In detail, the second estimate for UK economic growth in the first quarter surprised on the downside, with a print of 0.3% against expectations for quarter on quarter growth of 0.4%. This is while the US economy swung into contractionary territory during the same period as last week’s figures highlighted a -0.7% decline in GDP.
Furthermore, the current week saw the release of another round of PCE data in the US, which appeared to show the first quarter downturn in personal consumption persisting. This is despite a persistent strengthening of the labour market which has been complemented by a rate of wage growth that is, on average, improving.
Each of these figures have inevitably prompted some level of debate over the true health of the underlying economies and the likely timing of any eventual interest rate increases from the respective central banks.
As a result, today we address these concerns in respect to each region before reaffirming our outlook for both economies.
Looking ahead in the US
At present there is much debate over whether or not the weakness in US first quarter GDP numbers is due to cyclical weakness, the abnormally harsh winter weather or the so-called statistical anomaly that some analysts have suggested may be the true driver behind the developing pattern of under-performance in first quarter numbers.
While it is not possible to say conclusively which of the above three theories is more accurate, what is certain is that if the labour market data due from the US this week disappoints then it is quite likely that we will see concerns over the US economy begin to grow, which may force some analysts to revise their expectations for growth and interest rates.
However, on the whole, we are more sanguine in our outlook for the US economy as we expect that the downturn in private consumption has more to do with household preparations for an environment of higher rates than it does with concerns over the underlying health of the economy.
Although a sustained period of lower consumption would ultimately be bad for growth, we are happy at the current time to bet on an eventual rebound as domestic cash buffers increase and the overall financial position of households improves.
Looking ahead in the UK
In relation to the UK we maintain our conviction that the economy will likely continue to muddle on through the year’s challenges and that growth should, ultimately, remain at or above its medium term average.
Although the increase in GDP slowed slightly in the first quarter, we note in support for our belief that the annualised pace of expansion still remained at 2.4%, while several rounds of strong retail sales figures have also given us some indication that private consumption has remained at a more than reasonable level throughout the first half.
This bodes well for the full year numbers however, we also note that the economic performance of the first two quarters has been even in the face of a particularly uncertain general election, that normally would have sufficed to see some segments of the economy come to a standstill.
As a result, we reiterate our expectation that the economy will remain on a firm footing throughout 2015 and that this will probably encourage the Bank of England to begin looking to make a move on interest rates in the final quarter of the year.
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