Pound reaches record low for 2018

Fears over a no-deal Brexit sent the pound to the lowest level against the dollar and the euro this year, as Theresa May continued to struggle to gain support for her plan for Britain leaving the EU. Speculation against the pound has intensified over the course of the past month as markets have digested warnings from Mark Carney, the governor of the Bank of England, and leading Brexit backers arguing the UK would be prepared to walk away from Brussels without a deal.

FTSE 100 falters amid trade tensions

The FTSE 100 lost ground over the course of the last month, amid renewed tensions over Donald Trump’s trade tariffs on Chinese imports and concerns over the fallout from an unfolding economic crisis in Turkey. The Turkish lira plunged by more than 20% against the dollar earlier in August, after Trump said he would double tariffs on Turkish imports to the US, amid a diplomatic row over an imprisoned American pastor. The weak pound has helped support the FTSE 100, as many of the largest firms in the index derive much of their profit from overseas. The leading index of UK company shares has dropped by about 1% in the past month.

Meets forecast

Higher petrol prices drive inflation increase

The rising price of petrol triggered the first increase in inflation this year, placing renewed pressure on household budgets. The consumer prices index hit an annual rate of 2.5% last month, after holding at 2.4% in the previous three months, thanks to high global energy prices. The July reading for the retail price index, used for the setting of rail fire increases, rose at 3.2%, lower than the 3.4% in June but still triggering outrage from commuters after multiple cancellations for services across the country this year.

Better than forecast

Trade deficit narrows

The UK’s trade deficit – how much imports exceed exports – narrowed slightly, despite falling exports of car and aircraft amid weaker manufacturing output in Britain. The trade in goods deficit shrank to £11.4bn in June from £12.5bn in the previous month, beating economists’ forecasts for a deficit of about £12bn. The overall UK trade deficit for goods and services widened by £4.7bn to reach £8.6bn in the three months to June as fears mounted about the impact of Trump’s trade tariffs on Europe and the rest of the world.

Worse than forecast

Surveys point towards slowing growth

There were weaker readings for the British economy from closely watched surveys of business activity, pointing towards a surprise fall in output for the UK’s dominant services industry. The latest snapshot from IHS Markit and the Chartered Institute of Procurement & Supply purchasing managers’ index for the sector fell from 55.1 in June to 53.5 last month against expectations for a more modest decline to 54.7. Anything above 50 indicates expansion versus contraction. The PMI for the manufacturing sector also pointed towards slowing growth, while the construction industry continued a recovery after suffering amid heavy snowfall earlier this year.

Worse than forecast

Pay growth drops despite record unemployment

The rate of pay growth for British workers unexpectedly dropped to its weakest in almost a year, despite a fall in unemployment to a new 43-year low and the biggest drop in workers from the EU since modern records began. The Office for National Statistics said average weekly earnings rose by 2.4% on the year in the three months to June, down from the previous three months when they grew by 2.5% and falling short of economists’ forecasts for the rate to remain unchanged. The worrying trend from the labour market confounds Bank of England expectations for rising pay, with the jobless rate falling from 4.2% to 4%, the lowest level since the winter of 1974-75.

Better than forecast

Heatwave and World Cup boosts retail sales

England’s extended World Cup run and the continued summer heatwave provided an unexpected lift for retail sales in July, as consumers bought more food and drink from supermarkets. Providing breathing space for many struggling retailers, sales volumes rose by 0.7% last month from June, and were 3.5% higher than a year earlier, beating economists’ forecasts for a 0.2% monthly rise and a 3% annual gain. However, there are warnings the underlying trend for weaker sales since the EU referendum and the switch to online shopping is unlikely to reverse a trend for shop closures and redundancies across the sector.

Better than forecast

Public finances hand Hammond wiggle room

Britain recorded the biggest July budget surplus in 18 years, welcoming news for the chancellor, Philip Hammond, as he considers ways to pay for the promised increase in NHS funding. The ONS reported public sector net borrowing, excluding state-owned banks, went into surplus for July by £2bn, comfortably beating City analysts’ forecasts. The latest figures show government borrowing for the financial year so far is around £8.5bn below the same point last year, which could give Hammond more room for manoeuvre at the autumn budget.

Meets forecast

House prices edge higher

House prices showed signs of gradually edging higher last month, despite falling values in London and landlords quitting the private rental market. The latest snapshot from the Royal Institution of Chartered Surveyors house price index, measuring the balance of surveyors expecting price rises against those forecasting a fall, rose to +4 in July from an upwardly revised +3 a month ago, matching economists’ expectations. Somewhat faster price rises are expected by surveyors in the next 12 months, but sales volumes are falling at the fastest rate since October.

And another thing we’ve learned this month …

Interest rates are gradually rising again

The Bank of England raised rates, ushering in a new era of higher borrowing costs for consumers and businesses only months before Britain leaves the EU. Threadneedle Street raised its key interest rate to 0.75% from 0.5%, while some economists believe there will be further increases ahead. Economists at the City bank Berenberg forecast rates could reach 1.5% by the end of 2020. However, Britain crashing out of the EU without a deal could cause the Bank to stage an emergency rate cut. Mark Carney, the Bank’s governor, warned a no-deal scenario would be “highly undesirable”.