Written by Adam Chester, head of economics, commercial banking, Lloyds Bank
ALL eyes may be on the domestic post-EU referendum economic outlook, but during this period of global economic volatility it’s important that UK businesses keep a close watch on the bigger picture.
There has been no shortage of negative data on the UK economy – in particular the latest Lloyds Bank purchasing managers’ index, which reported that business activity in July slipped further below the long term average to a level, which if sustained, indicates some contraction in the economy.
And with so much happening on our doorstep, it’s easy to overlook the fact that there are global factors in play that have the potential to impact British businesses, and not just those that are big international players.
Across the Atlantic
In the US, the election in November could bring yet more uncertainty, and the possibility of another interest rate rise before the end of the year could upset markets, which currently attach a probability of less than 50 per cent to such an outturn.
The US central bank has made continued improvement in the US labour market a key precondition for a rise in US interest rates, and last week’s employment report was surprisingly strong, with job creation rising by a bigger-than-expected 255,000.
That’s the second consecutive month that jobs have risen by more than 250,000 – well above the three-year average gain of 223,000.
Following the report, bond yields and the US dollar spiked higher, prompting another lurch lower in GBP/USD exchange rate.
We doubt the latest jobs numbers will be enough to prompt a move by the Fed next month, but a 0.25 per cent rise by the end of the year remains firmly on the cards.
A stronger dollar is good for British exporters as it means exports to America are cheaper.
However, it also means that imports are more expensive, which pushes up the costs of doing business, while exports are also vulnerable to potential fluctuations in US domestic demand.
In Asia, Japan has now unveiled a long-awaited fiscal stimulus package, though while it was big in size, it was short on detail.
Moreover, the Bank of Japan disappointed markets by not delivering another interest rate cut at its July meeting. We now wait to see whether this will come at the next meeting in mid-September.
Chagrin over China
That great driver of the global economy, China, has so far seen mixed news for July.
It posted a larger than expected trade surplus but as this was primarily due to a sharp fall in imports it is really a signal of weaker domestic demand in China.
More positively, however, China’s purchasing managers’ indexes suggested that the economy is stabilising.
A raft of other data are due later this week including retail sales and industrial production. These will also be watched for signs of a rebalancing of China’s growth away from exports and manufacturing towards consumer spending and service sectors.
Closer to home, there is still speculation of further economic stimulus in the EU, as inflation remains stubbornly below the ECB’s target.
It is still hoped that an uplift in the global economy may help free the ‘spanner in the works’ caused by the UK’s vote to leave the EU and help firms overcome their uncertainty.
So far the signs are mixed, but it is still worth keeping a close eye on the horizon for any harbingers of happiness.