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+++The April update of the UKES, our indicator of the health of the UK economy, shows a marked loss of steam even earlier than anticipated – see below+++

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UKES

United Kingdom Economy’s State

+++12 April: Expectations swoon early as manufacturing boom comes to an abrupt end+++

So it has happened way earlier than anticipated even by us notorious pessimists: In the last update of the UKES, we had predicted the expectations component of the index to drop through both the state component and the main indicator line as soon as any roadblocks on the path to a Brexit deal will appear during the summer. Now, with the services PMI turning sour and manufacturing’s expansion coming to a stuttering halt, expectations are swooning already. True, some of that sharp drop in the service sector’s activity was due to the “Beast from the East” holding the UK and its economy in an icy grip in March; yet most observers had expected that effect to be counterbalanced by an early Easter pushing retail sales. That, plainly, failed to materialise. What’s worse, the bright spot in recent months, the manufacturing sector has been taking a hit, too: In February, industrial production grew by a mere 2.2 per cent on a yearly basis and thus far below expectations, with manufacturing itself experiencing even an output drop of 0.2 per cent month-on-month after flatlining in January – the first drop in eleven months. All these effects could not be weighed up by the other elements comprised in the expectations component of our UKES, such as currency movements or wage growth, so that the sub-indicator fell to an outright if slightly negative level of -0.21 points not seen since the time shortly after referendum day. The signs are the UK economy is losing steam in an even more pronounced fashion than anticipated (see the coming April issue of our monthly bulletin); if Brexit negotiators fail to surprise on the upside (chances for which are slim), Britain is in for a recession.

Sources: UK Parliament, Office of National Statistics, CNBC, London Stock Exchange, Trading Economics, Bloomberg

Our own UKES is an indicator of the condition of the UK economy which, otherwise, does not exist in this comprehensive form. It consists of two components and the main index.

The component “expectations” runs ahead of the current situation, comprising elements such as development of inflation and interest rates, consumer- and business confidence, etc. The “state” component describes the current situation and comprises data such as industrial production, net trade, etc. The main index, then, is a smoothed combination of the two components.

The UKES describes the development of the British economy in the recent past rather precisely; particularly the expectations component has emerged as a valid tool for prognosis. It is calculated to scale so that a positive reading of the state component as well as the main index signals current economic expansion. Furthermore, the UKES generates these other signals:

When the expectations graph rises through that of the state component, that is a valid signal for an economic upturn in the near future (3-6 months) and vice versa for a break-down through the state graph. When the state component, additionally, plots over the main index, that signals a healthy and stable economic expansion; when it plots beneath the main index, the current economic upturn has not yet solidified.

Indicators

Imports growth (Feb.)


Manufacturing PMI (March)


Consumer confidence (Feb.)


Business confidence (Feb.)


Individual country ranges according to historic max-/min levels

Sources: US Bureau of Economic Analysis, US Bureau of Labor Statistics, US Census, Australian Bureau of Statistics, Instituto Brasileiro de Geografia e Estatistica, Customs General Administration of China, bloomberg, Institut national de la statistique et des études économiques (INSEE), UK Office of National Statistics (ONS), Trading Economics