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Economy in Brief

U.K. Economy Shows Weakness All Around
by Robert Brusca  May 5, 2016

U.K. sector PMIs continue to lose momentum as the date for the Brexit vote looms. There is no way to connect the dots and blame the weakening on fears over Brexit, however. In Europe, the EMU PMIs have stepped down but have since moved sideways and are stronger all around over this period. The U.K. is not simply following Europe.

Oh-for-three

We see more or less steady declines in U.K. manufacturing, services, and construction. The three sectors are consistently ranked low in their ranked queues of data back to January 2011. The overall private sector index has been weaker 17% of the time, manufacturing has been weaker 15% of the time, services have been weaker 17% of the time, and construction has been weaker 23% of the time. Every sector is at least in the bottom quartile of its respective queue of data on this period.

Highly consistent sector weakness and timing of weakness

The three measures are at their respective lowest points since mid-2013 or early-2013. The degree of weakness is uncannily consistently weak across sectors in both its magnitude and timing. Is it because all have the common cause of concern about Brexit or because they all have the same macroeconomic forces weighing on them? We have too little evidence to know.

Brexit, the biggest domestic risk

The Bank of England has taken no official position on Brexit, but Governor Mark Carney did weigh in saying that he thought the EU connection was importantly responsible for improving aspects of the U.K economy. He has also called Brexit biggest domestic risk to U.K. financial stability. U.K. financial institutions have background plans to move staff and set up new operations should Brexit be approved because of fears that U.K. financial institutions operating out of the U.K. would find their ability to conduct European operations hampered under a Brexit scenario. Clearly, the U.K. as a country and London as a financial center have slightly different interests at stake.

No clear evidence of financial services getting hit harder

Even so, the Markit PMI data show quite even impacts across the various sectors: from manufacturing to construction to services, where the financial services business resides.

The nature of global malaise

The PMI queue standings for manufacturing in Europe and for the big four EMU economies are uniformly higher than these standings for the U.K. and its sectors. The U.K. PMIs are lower in their percentile queue standings than for the EMU and are falling faster. U.K. GDP growth has been outperforming EMU growth, but the PMI data suggest that the U.K. is now weakening faster. The U.S. is doing better than both the U.K. and Europe. But the U.S. and the U.K. each have had much better success in reducing unemployment rates than has Europe generally (except for Germany). Yet, the U.S. is showing various late cycle characteristics despite its overall better economic performance. The U.K. is simply showing a hint of exhaustion. The EMU is chronically lethargic and like Japan, unresponsive to stimulus efforts.

And odd-ball `recovery' with different markers

It has been an odd economic recovery but since it was also a recovery from a financial crisis. It is not surprising that the path of recovery has been different from previous pure recessionary episodes. Still, the fact that growth has never really seemed to top out, means that the cycle does not have any of the feel of a boom/bust cycle. Nevertheless, we measure economic pressure not relative to past cycles' high growth rate marks but relative to our economy's current potential for growth. Globally the potentials for growth have been cutback everywhere including China and the U.S.

Unexpected prerecession markers?

The U.S. has seen its first rise in the unemployment rate in a while, a jobless claims low that is the lowest since 1973 (yes!), a new cycle low in its insured rate of unemployment, and steady declines in the growth rates of exports and imports (even excluding oil). These sorts of markers often presage the end of the recovery. But in the U.S., the debate is about when the Fed will hike rates next! U.K. policy is on hold because of concerns about Brexit and the obvious decline in momentum in the economy. In the EMU, policy is still stimulative with negative rates in play and the ECB registering optimism about its policies even as its back seems to be up against a wall. Just today the EU Commission issued a statement about how the recovery would continue- but what else would you expect them to say? Japan surprised markets a week ago when the Bank of Japan met and did not offer any new stimulus. What no more? China's PMI data tell a story of ongoing and persisting lethargy albeit at growth rates that sound high to the western world.

Mad-hatters; no tea party

There is more than a touch of Lewis Carroll in all of this. None of the usual markers for recession are really in place and where they are showing no one wants to see them. It just doesn't feel like recovery should be over. But do such `feelings' matter? In the U.S., most particularly job growth is slowing, hours worked are slowing, and productivity is stuck in a low-growth track. Productivity rarely accelerates late in the business cycle; yet, acceleration is what is expected by the U.S. monetary authority which sees more not less growth ahead. Can we have `more' when we haven't had any?

Risks are not always where you expect to find them

Maybe the Fed draws to an inside straight on policy. Maybe Brexit is not approved and Carney's concerns for the U.K are not tested. Maybe all the ECB's moves will bear fruit and the impact of past stimulus is just stuck in a clog in the pipeline. And maybe Donald Trump will be the next U.S. president. There are a lot of seemingly possible and unlikely events that could come to pass. Any of them could have a profound impact on markets. The flagging U.K. PMIs are disturbing for that economy and make up one set of signals with an unambiguous message. Globally there are other examples of such weakness. The U.K. does not stand alone with weakening economic signals in play. The rest of the G10-world is not immune from the fickle recession virus just because recovery has been disappointing and interest rate levels are too low. If we have a recession under such circumstances, you can expect it will not be a normal one either.

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