UK GROWTH CONFIRMED AT 0.5% IN FIRST QUARTER
But UK business investment and household spending are down
More signs of weakness in the Australian economic data
Sterling started the week badly but recovered on Tuesday and Wednesday, adding a cent and a half. It spent the remainder of the week drifting sideways. When London opened this morning it was sitting on a net gain of just over a cent on the eight-day week.
Sterling's rough start to the week came with the help of a worse-than-expected monthly figure for public sector net borrowing. Net borrowing in April was £7.7 billion, not far off double the £4.4 billion pencilled in by investors and a record for that month. Reasonably, the thought was that if the government is trying to rein in the deficit it is not making a particularly good fist of it. Tuesday's revised figures for first-quarter gross domestic product were not much to write home about either. They showed household spending down by -0.6% on the quarter and by -0.3% over the 12 months to end-March. The equivalent numbers for business investment were -7.1% and -3.2%. Here, too, investors were perplexed: if neither businesses nor households are spending money, what will drive the recovery?
The market did not punish the pound for the GDP data though, largely because the figure of 0.5% for GDP growth in Q1 was unaltered after the revision. Inevitably, many investors would have been suspicious of a downgrade. There was a relief rally when it failed to materialise. The week's only two other UK statistics were unexceptional. Gfk's index of consumer confidence "improved" from a fairly miserable -31 to a slightly less downbeat -21. Nationwide's house price index rose by 0.3% in May to leave it -1.2% lower on the year.
The main contributor to sterling's weakness at the beginning of last week was a warning from Moody's that it was considering a downgrade to the credit ratings of 14 British banks and building societies. Having given due consideration to the matter, investors decided it was nothing to worry about. Moody's sole reason for the reassessment is that UK banks are currently underwritten by a government guarantee. When the institutions are once again judged sound enough to stand on their own two feet that guarantee will be withdrawn. Without a government guarantee they will be intrinsically more risky. Investors were not uncomfortable with that logic and did not see it as a reason to lay into the pound.
The Australian economic data continue to look flaky. Of the figures released over the last week only one, private-sector capital expenditure, was above than the previous quarter and higher than expected. The Conference Board's leading economic index slowed from 0.6% to 0.4%. An equivalent measure from Westpac was flat at 0.5%. Corporate gross operating profits declined by -2.0% in Q1. Lending to the private sector was flat in April.
Significantly, the residential property sector is showing signs of struggling to maintain the high prices to which everyone has become accustomed. Figures today from Data Rismark show that although the price of cheaper property has crept higher, the luxury end of the market is under pressure. In Melbourne the top suburbs suffered an average price fall of -3.5% in the year to April. Nationally the decline was -5.4%. Whilst Sydney, as a whole, saw prices rise by 0.5%, Perth is down by 7.1% on the year. Building permits fell by -1.3% in April. The news coincided with a report that "Two thirds of 20- to 45-year-olds have given up on home ownership" because of unaffordable prices.
Investors' take on the property situation was that it would dissuade the Reserve Bank of Australia from being in a hurry to raise interest rates, especially in view of the proposed carbon tax that would cost the private sector around A$11.5 billion in its first year of operation.
There could be more bad news to come this week. The AiG performance of manufacturing index is expected to remain below the 50.0 boom/bust divide and Australia's GDP is forecast to have shrunk by -0.3% in Q1. UK statistics will be in short supply; just mortgage approvals and the PMIs.
Whilst it is becoming increasingly tempting to look for a reversal of the Aussie's two-and-a-half-year rally it is still too soon to call a reversal.