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By HaleStewart October 15, 2013 3:34 pm
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UK Economy Continues To Show Improvement

Last week, the Bank of England maintained their interest rate policy at .5%.  Their press release stated the following:

The Bank of England's Monetary Policy Committee at its meeting on 9 October voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

The Committee reached its decisions in the context of the monetary policy forward guidance announced alongside the publication of the August 2013 Inflation Report.

The UK has been in very weak financial shape for the last few years as shown by this chart of annual GDP growth:

Growth dropped further in 2012 to right around 0%.  But the most recent number of 1.3% is very encouraging, as are other recent economic numbers.  For example, Markit’s manufacturing survey is now at a 2 ½ year high:

The UK manufacturing sector continued to expand at a marked pace during September, to round off its strongest quarterly performance since the opening quarter of 2011. The labour market also showed further signs of improvement, as the rate of job creation climbed to a 28-month peak.

At 56.7 in September, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) remained in expansion territory for the sixth successive month and was little-changed from August’s two-and-a-half year

As the chart shows, this indicator is in a strong uptrend, adding to the bullish argument for the UK:

And the Markit services index is also in strong shape:

The UK service sector continued to perform strongly in September to thereby round off the best quarterly performance of the sector since Q2 1997. Activity and new business both rose at rates close to August’s highs, while there was a return to solid employment growth following the previous month’s slowdown.

After accounting for seasonal factors, the headline figure from the report, the Business Activity Index, recorded a level of 60.3, only fractionally down on August’s near seven-year high of 60.5. That signalled another strong rise in activity on a monthly basis, and extended the current run of continuous growth to nine months. Over the third quarter as a whole, the index averaged its highest level since Q2 1997.

Like the manufacturing sector, this indicator is also in a strong uptrend:

The Bank of England’s most recent policy minutes includes the following synopsis of recent economic events:

12 The estimate of GDP growth in the second quarter had been revised up a little to 0.7% in the second release. The initial estimates of the expenditure breakdown had suggested that growth had been fairly broadly based, with investment and export growth both a little stronger than the Committee had anticipated. Such initial estimates for the expenditure components were, however, highly uncertain. There were other reasons for caution. For instance, the strength of exports was concentrated in a couple of subsectors and appeared erratically strong by comparison with the growth of world trade volumes during Q2; and the large positive contribution to growth from stockbuilding would probably prove transient, especially if it were simply a bounceback from the temporary de-stocking observed in the first quarter.

13 Nevertheless, that modestly promising data release had been augmented by the continuing strengthening of the indicators of consumer spending in 2013 Q3 and further strong business surveys in August. The Markit/CIPS services activity index was broadly unchanged in August, after having increased sharply in July, and the manufacturing and construction indices had strengthened further. Consequently, the composite PMI was at its highest level since 1997. The CBI service sector survey had also strengthened in August. Overall, Bank staff estimated that the initial estimate of output growth in the third quarter would be around 0.7%, compared with the 0.5% expected at the time of the August Inflation Report. Moreover, the early indicators for activity in Q4 tentatively suggested further strengthening towards the end of the year. Overall, these data provided further evidence in support of the pickup in growth assumed at the time of the August Inflation Report and, if anything, posed an upside risk to that path.

The tone is cautiously optimistic.  While acknowledging the newness of expansion and the inherent problems with this data (see paragraph 12, above), they note the breadth of the positive numbers by citing both the Markit service and manufacturing numbers.  Also noted is an increase in projected third quarter GDP, rising form .5% to .7%.  While this growth is not “gangbusters” it would mean an annual growth rate around 2.8% which would indicate a further acceleration in the UK’s growth trend.

Overall, the data coming out of the UK is positive.  But we are still a long-way from a "self-sustaining" recovery.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer


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