Mounting no-deal Brexit fears hit sterling
The rising likelihood of no-deal Brexit has dragged down the pound on the foreign exchanges over the past month, as the prospect of a no-deal-focused Boris Johnson as prime minister becomes more likely. Sterling had fallen sharply to less than $1.26 against the US dollar and to about €1.12 against the euro. However, the US Federal Reserve coming closer to being forced into cutting interest rates amid fears over a slowing US economy has dampened the strength of the dollar in the past week. This has helped to inflate the value of the pound. The outgoing head of the European Central Bank, Mario Draghi, also suggested that the eurozone requires more economic stimulus, which has sapped the strength of the euro.
Stock markets surge amid stimulus talk
Mario Draghi using one of his final speeches as ECB president to suggest that interest rates in the eurozone may need to be cut further has helped European equities power ahead over the past month. Increased stimulus can help the stock market to rise, as companies’ borrowing costs are cut. Investors have also become more positive about the chances of a resolution in the US-China trade dispute, after a prolonged period of concern over the standoff between Washington and Beijing. Although rate cuts from the US Fed could suggest a weakening economy, the prospect of stimulus from the US central bank has also lifted markets.
Business surveys paint weak growth picture
Surveys of business activity used as early warning signals for the British economy by the Bank of England and the Treasury suggested that UK economic growth remained weak last month. The latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply showed that service sector activity, which accounts for four-fifths of the economy, strengthened in May, despite manufacturing and construction slumping into contraction amid heightened levels of uncertainty over Brexit. The IHS Markit/Cips services purchasing managers rose to a three-month high of 51 from 50.4 in April, following a rise in domestic orders. A figure above 50 indicates growth. Still, economists warned the pattern of growth remained close to stalling point.
Jobs growth slows amid Brexit uncertainty
After months of employers appearing to shrug off Brexit concerns, jobs growth slowed in the three months to April. Employment in Britain increased by 32,000 to reach a record high of 32.75m, according to the ONS, significantly down on the 99,000 jobs added to the workforce in March. Driven by rising self-employment and women entering work, economists said the weak gains suggested that companies were becoming jittery about Brexit. The jobless rate has, however, remained at the lowest level since the mid-1970s, while annual growth in average weekly wages increased to 3.4%, up from 3.3% in March. Total average pay including bonuses rose by 3.1%, down from 3.3% in March, but beating economists’ forecasts for growth of 3%.
Brexit stockpiling set to fuel economic slowdown
After fuelling an upswing in economic growth earlier this year, the stockpiling rush ahead of the original Brexit deadline is poised to drag on the economy over coming months. UK firms face renewed risks around how to plan for no deal after the delay until the autumn. Some firms are likely to run down their stocks rather than place new orders, hitting growth, according to the Bank of England, as it slashed its forecast for the second quarter to zero from a previous rate of 0.2%. The Bank’s network of regional agents believes about a tenth will scale back their plans, while others will maintain theirs or ramp them up ahead of the autumn. Although Boris Johnson has urged Britain to do more planning for no-deal Brexit, most firms say they are “ready as they can be”, according to the Bank. However, the lack of clarity limits the extent to which they can be fully ready.