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By HaleStewart October 8, 2014 8:59 am
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The UK Isn't As Strong As You Think

     After the first of the year, the UK had the best economic numbers of the developed world, hands down.  PMIs were hitting high levels and GDP growth was strong.   But over the last few months, the strength of the underlying data has weakened, indicating a slowdown from these high levels may be on the horizon.

     The strongest evidence of this is contained in the latest Markit PMI press release:

The mid-year slowdown in the rate of expansion of manufacturing production continued in September, as growth of new orders eased to near-stagnation. Companies indicated that new business rose at softer rates from both domestic and overseas markets.

Growth of new export business was the slowest in the current 18-month sequence of increase, as the sterling-euro exchange rate and weaknesses in the euro area economy impacted on sales to a number of nations within the currency union. Where an increase in new export orders was reported, this reflected demand from North America, Germany, Scandinavia and the Middle East.

Not only are we seeing a slowdown in domestic orders, but we are also seeing a drop in EU orders.  The domestic drop is to be expected as no country can maintain the torrid expansion pace reported at the beginning of the year.  But the decline in EU orders indicates the overall continent wide deflationary spiral is spreading, impacting trading partners.

     Also consider the near stagnation in the index of production reported earlier this week from the ONS:

     One month of flat growth is statistical noise that is near meaningless.  A trend that has been in place since just after the first of the year is instead a pattern to be heeded.

     And finally there is the coincident economic index from the Conference Board:

     The index had a reading of 107 in April and 106.9 in July (the latest date for which we have data).  Two components stand out in the table above.  Industrial production has stalled with readings of 98.2 in April and 98.3 in July – a pattern that confirms the above chart of production.  And second, there is the total number of employed, which has actually fallen from 30,643 in April to 30,601 in July. 

     While there is nothing in the above statistics to indicate the UK is heading towards a recession, it is quite clear the torrid pace of expansion the economy experienced at the beginning of the year has abated.  Also consider the spreading impact of the EU's economic malaise on its trading partners.  While the UK geographic proximity implies a stronger impact from the EUs slowdown, other continental trading partners should also be feeling the bite.

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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