As has often been the case in post-financial-crisis UK, the consumer came to the rescue as Q4 2015 GDP was revised to show faster economic growth than expected – at 0.6% Q/Q and 2.1% Y/Y – primarily driven by consumer spending and the first case of growth in manufacturing output for a year. However, the good news on growth has been solidly overshadowed by a truly abysmal current account release: in the final quarter of last year, the UK borrowed £33 billion from overseas – or 7% of national GDP – marking the single largest current account deficit since World War II. This reliance on overseas investment has already been used as a talking point by the UK Chancellor, who stated “now is precisely not the time to put our economic security at risk by leaving the EU”.
Nonetheless, the root of the UK’s debt problem might be more easily answered: the steep decline in commodity prices throughout the last few months of 2015. Some of the UK’s largest companies (read: BP (LON:BP), Shell (LON:RDSa), Centrica (LON:CNA), Rio Tinto (LON:RIO) and others) make a living through sizeable investments in commodity assets abroad which, throughout the second half of 2015, were heavy loss-makers and large contributors to the current account deficit. If this is the case, we can expect a sharp snapback in the same release in three months’ time should commodity prices stabilise.
Market expected to look through US Labour market noise
Heading into today’s Nonfarm Payrolls release, US labour market data has been persistently strong – but the Fed’s focus on these measures appears to be dwindling as the days and weeks go by. Earlier this week, Fed Chair Yellen outlined the major risks to the US economy that need to be quelled before further rate hikes can continue; overseas financial stability, less volatile domestic housing and commodity markets, and a cap on the near-term strength of the US dollar. Pointedly, there was no mention of the robustness in US jobs. As such, the relative strength or weakness of today’s release could prove transitory. If the data is strong, rate hikes are still not a tangible possibility in the near term. If the data is weak, the same case applies.
The headline Nonfarm Payrolls reading is expected at 205,000, with the unemployment rate expected to remain unchanged at 4.9%.
Growth woes still apparent in China – but relief could be on its way
This morning’s Manufacturing and Non-Manufacturing PMI data from China was decidedly poor. According to the Caixin/Markit Manufacturing PMI survey, growth contracted for the 13th consecutive month in March. However, there are clear green shoots in the report – manufacturing contracted at the slowest rate in over a year and was stronger than consensus. Separately, China’s official Manufacturing PMI (a survey of the larger, mainly publicly owned firms) actually showed expansion for the first time since July last year. Should this effect trickle down to the smaller Chinese firms, it’s only a matter of time until global central banks have to stop using Chinese uncertainty as an excuse not to raise interest rates.