UK economy going nowhere fast
Unfortunately, we never quite managed to get a full run of upbeat purchasing managers index data, with yesterday’s service PMI coming in at 52.6, below consensus expectations of 54.3. Although it does still signal growth in the UK service sector it is sluggish and further underlines the fragility of the service sector – which is the largest sector in the UK economy. With all the PMI surveys released so far, the current forecast is for the UK economy to grow 0.5% in the first quarter of 2011. Now, compare that to the 0.6% contraction in quarter 4 of 2010 and the UK economy appears to be going nowhere fast.
This all really begs the question; can the UK economy take a rate rise in the near term? The Bank of England Deputy Governor Charlie Bean echoed this sentiment in a speech yesterday, warning that the economy still faced “significant headwinds” and had shown signs of “fragility”. Like his boss Mervin King, he blamed inflation on the shocks from higher VAT, booming commodity prices and a weak pound – which has caused our imports to be more expensive and thus added inflationary pressures. In his statement, Charlie Bean strongly hinted that unless the UK economic data consistently improves he would be unlikely to vote for a rate increase. With the market pricing in a rate hike in May there is now a strong sense that this may be put back still further.
His comments are in stark contrast to our European partners, with ECB President Jean Claude- Trichet making a very hawkish statement at yesterday’s ECB press conference. He stated that a rate rise next month was ‘possible, but not certain’. Now it may sound like I am clutching at straws, but in terms of central bank members’ comments this is a pretty strong hint that rates will rise next month –although it does provide some wriggle room if the sovereign debt crisis comes to the fore again. Trichet’s statement provided significant support for the euro with GBP/EUR trading at 1.1634 in early morning trading. The euro also strengthened against the US dollar with EUR/USD at 1.3965, approaching the physiologically important 1.4000 level.
In a quiet day for data releases, the highly important US non-farm payrolls are announced at 13.30. Consensus forecasts expect the US economy to add 183,000 jobs in the last month with any significant deviations from this figure likely to cause volatility in the US dollar. At present, the GBP/USD is trading at 1.6239, slightly down form yesterdays 13 month highs.