Sterling stages modest recovery

The pound has had another turbulent month as Boris Johnson ramps up the rhetoric over no-deal Brexit. Sterling has plunged whenever the prime minister has talked up the chance of such a scenario, and has been driven back up again whenever there are any signals of progress towards an agreement with Brussels. Comments from the German chancellor, Angela Merkel, about the possibility of a deal sent the pound to the highest level in three weeks against the dollar last week. Sterling is up by about 1% to roughly $1.23 and 0.6% up on the euro to around €1.10 since the start of August. The pound is still substantially down from a peak of about $1.33 in March and remains 18% below its level before the EU referendum three years ago.

Stocks plunge on US-China trade war fears

The rapidly escalating US-China trade war has sent global financial markets tumbling over the past month, amid rising fears about the impact of the long-running dispute on the world economy. Washington and Beijing have ratcheted up the tariffs they impose on each other’s goods, while Donald Trump spooked markets last week by demanding that US companies repatriate their operations from China. Central banks around the world have come under pressure to ease monetary policy to provide more support as the global economy feels the strain of falling trade volumes and weaker investment by increasingly cautious businesses. Trump is demanding the US Federal Reserve cuts interest rates, as fears grow over an economic slowdown in the US.

Worse than forecast

Shock inflation rise hits households

UK inflation unexpectedly rose above the Bank of England’s 2% target in July, putting renewed pressure on British households as the cost of living increased. The rising price of computer games, consoles and hotels lifted the consumer prices index (CPI) measure of inflation to 2.1% in July from 2% in June, above the forecasts of City economists. Analysts warned that no-deal Brexit fears hitting the pound would push up inflation over the coming months, as falls in sterling raise the cost of importing goods. The latest figures also confirmed a rise in UK rail fares of 2.8% for January, set using the retail prices index (RPI) measure of inflation, which is usually higher than CPI.

Better than forecast

Imports slump after stockpiling rush

Britain recorded the first monthly trade surplus in more than eight years in June amid a plunge in imports, as UK companies eased back from stockpiling goods from abroad. British firms had rushed to buy goods from the EU and elsewhere in the lead-up to the original 29 March Brexit deadline, leading to an imports surge and pushing the UK trade deficit – the gap between imports and exports – to the highest levels on record. Now running down their supplies rather than placing new orders, imports have fallen. Over the three months to June, imports plunged by £18bn. The UK goods and services trade balance was in surplus by £1.8bn in June, after a deficit of £2bn in May, beating the forecasts of City economists.

Better than forecast

Recession fears linger despite rising business activity

Britain’s dominant services sector recorded an unexpected rise in economic output last month, according to the closely watched purchasing managers index from IHS Markit and the Chartered Institute of Procurement and Supply. The increase in activity in the sector which includes hotels, restaurants and finance accounts for about 80% of GDP – which could spell good news for the wider economy. However, economists warned that the UK remained close to stalling point on the brink of recession. The manufacturing and construction sectors remained in contraction, as Brexit fears weigh down on British firms’ activities.

Worse than forecast

Unemployment rises while wages grow

Unemployment unexpectedly increased in the three months to June in a sign that the UK jobs market is gradually running out of steam as Brexit looms. The UK jobless rate rose to 3.9% from 3.8% in the three months to May, worse than had been expected by City economists. Despite the slight increase, unemployment remains at the lowest levels since the mid 1970s. Workers’ pay growth increased to the fastest pace in 11 years, as the rising government minimum wage helped drive up average wages. According to the Office for National Statistics, annual average pay – excluding bonuses – rose by 3.9% in the three months to June, the highest rate since June 2008. However, average wages after inflation remain below the pre-financial crisis peak.

Better than forecast

Online spending fuels retail sales growth

Consumer spending in Britain unexpectedly increased in July, helped by the strongest rise in online spending in three years. In a sign that consumers are continuing to take the heightened levels of political turmoil over Brexit in their stride, the volume of goods sold in July increased by 0.2% on the month. City economists had forecast a fall in spending by a similar amount. Analysts said that rising wage growth and relatively steady inflation has helped rebuild UK consumers’ spending power, although they warned that no-deal Brexit could induce a sharp fall in consumption over the months ahead.

Worse than forecast

Johnson’s spending spree raises public borrowing

Boris Johnson is on course to overshoot the government’s budget target by at least £8bn this year after extra spending on the NHS and preparations for a no-deal Brexit cut the surplus in July. The public finances were down by £2.2bn compared with July 2018 to leave a £1.3bn surplus last month, worse than had been expected by City analysts. Alongside January, July is typically a surplus month because individuals make their self-assessment returns in those months. However, the surplus was smaller than expected due to rises in central government spending, much of it on salaries, as Whitehall departments stepped up hiring to cope with Brexit. The weaker position in the public finances comes as Johnson pledges to raise spending across the board, on areas such as police, defence, the NHS and Brexit planning.

Worse than forecast

House prices fall as Brexit fears mount

Mounting fears of no-deal Brexit appear to have dragged down house prices across the country last month, as families showed an increasing reluctance to moving home amid the political turmoil. A gauge of house prices from the Royal Institution of Chartered Surveyors – which shows the difference between members reporting price rises and falls – dropped to -9 in July from -1 in June, a steeper decline than had been forecast by City economists. According to official figures, house prices in the south of England are falling for the first time since 2009, amid a broader slowdown across the country since the Brexit vote.

And another thing we’ve learned this month … Britain is preparing to leave the EU as the global economy slows

Supporters of Brexit argue that leaving the EU would enable the UK to strike new trade deals elsewhere around the world. However, conditions for global trade have deteriorated significantly in recent months as the US-China trade war rages. The escalation of the long-running dispute between Washington and Beijing has sunk factory output around the world and dragged down business investment, with companies reluctant to spend while the world’s two biggest economic superpowers impose tariffs on one another’s goods.

According to surveys of global factory output compiled by IHS Markit, the tensions have tipped world manufacturing into recession territory. Economic growth has slowed in several countries, including in the US and the eurozone, as fears mount of a global recession. Economists warn that leaving the EU – which is the world’s largest free trading bloc – into an increasingly protectionist world could further damage the UK economy.

