Overview of the week commencing 3 July
Graham Cross, CEO
This week we focus on UK’s balance of payments and Chinese manufacturing.
The UK’s current account deficit grew from £12.1 billion in Q4 to £16.9 billion in Q1. A wider trade deficit – of something like - £8.8 billion in Q1 compared with - £4.8 billion in Q4 – was the main factor in the increased gap. A £16.9 billion deficit is equivalent to 3.4 percent of GDP.
That’s not normally something we would greet with relief but this is the second time that the deficit has come in at less than 4.0 percent of GDP, sustaining an improving trend from the horror show that represented the late 2015 figure. Back then the deficit was as high as 5.5 percent of GDP.
The recent series of declines in the Chinese Purchasing Managers’ Index (PMI) survey has been arrested, or so it seems. The official manufacturing PMI, released on Friday, came in at 51.7 for June, up from 51.2 in May and 50.3 in April.
The unofficial PMI, compiled by Caixin, has displayed a more pronounced decline of late, actually dipping below the 50.0 neutral mark in May. But, ahead of Monday’s release, and so long as we don’t see a significant decline, we think we can begin the week in a relaxed mood.
Actually if the Caixin PMI comes in above 50.0 and if the corresponding services PMI’s come in higher too, we’ll be positively ecstatic. That’s not to say that we are particularly bullish on China’s economic prospects – the dragon economy faces challenges in the years ahead that make Brexit look like a walk in the park. In fact, I am convinced that Chinese output growth will slow markedly compared with the average over the last two decades or so.
The question is, will slowing output growth be associated with an orderly rebalanced economy, or with a disorderly collapse. Fingers crossed for the former.
Confidence has been seen elsewhere too
First in South Korea where consumer sentiment stands at it’s highest in five years. Newly elected President Moon Jae-In will be pleased with that. He’ll be less pleased with sentiment over the border in North Korea.
Spirits are high in Germany too where the ifo Business Climate Index reached a new record high in a series that stretches all the way back to 1991.
Less impressive, but still welcome, are modest gains in US consumer sentiment after two consecutive monthly declines.
Unfortunately though, confidence missed the UK where the mood darkened quite a lot during June. The GfK NOP composite index fell from -5 in May to -10 more recently. Of course, we are not cheered by falling real wages, surprisingly high inflation and a minority government.
Finally, the Nationwide House Price Index gained 1.1 percent bringing the average price of a home to £211,301. Actually, that average hides a very wide range indeed. The cheapest homes can be found ‘up north’ where the average is just £125,237. You wont be surprised to learn that London houses the most expensive homes, coming in at £478,142 on average.