UK Economic Indicators Show Mixed Signals Amid Speculation of Tax Increases

UK Economic Indicators Show Mixed Signals Amid Speculation of Tax Increases

The United Kingdom’s economy painted a confused picture as multiple indicators sent mixed signals in recent releases showing both growth and worrisome trends emerging. The UK’s gross domestic product (GDP) grew by a mere 0.1% in August, as widely predicted. Last month’s growth number was revised down to -0.1%. That steep decline was later met with an increase, indicating partial recovery just as the summer was winding down. In the three months to August, the trade deficit had increased by an alarming £3 billion. This growth has exacerbated worries about our external trade balances.

All the while the trade in services surplus grew by £1.3 billion over the same period – even as the overall trade deficit continued to widen. Goods exports took a hit, particularly in key markets including the United States. At the same time, the services sector kept on chugging along. There were goods exports to the US that fell £0.7 billion. This dropoff saw a marked reduction in sales of precious metals.

Trade Deficit and Surplus Trends

The trade deficit’s rapid growth is a serious worry for economists on both sides of the aisle. As the £3 billion increase in the deficit shows, our fundamental problems with balancing international trade remain. Exports of goods, perhaps one of the best indicators of a state’s fortunes given current political and economic uncertainties, took an especially hard hit.

The increase in the trade in services surplus reflects strength in this sector. The UK’s unmatched ‘clout’ in service industries such as finance and technology powers the UK’s economic prowess. That resilience holds even as goods exports continue to fall. The £1.3 billion increase just announced is a recognition of strong delivery in places more insulated from global supply chain chaos.

Industrial production was up 0.4% in August and manufacturing production was up 0.7%. That’s good news. A similar increase among physicians. These numbers represent a comeback in some industries and that means even as some occupations falter, others are on the rise. This resilience in manufacturing may bode well for a continued move towards recovery as firms learn to do business in the new normal.

Stock Market Performance

The reprieve was short-lived, as financial markets were understandably jittery at these contradictory economic signals. This week, the FTSE 100 index has underperformed both on an absolute and relative basis against all major global equity indices. So far this session it is down 1.3% over the past five sessions. Investors are understandably on edge amid the young administration’s speculation over contentious tax increases. As currently proposed these hikes would represent over £50 billion in tax increases in the coming years.

The expected tax increases have introduced a new level of unpredictability to market expectations. Investors are understandably glued to these developments, given their potential to drive $2 trillion+ in changes to corporate profitability and consumer spending. For some industries, however, business is booming. Other groups will suffer if higher taxes cut into those disposable incomes and spending powers.

Commodity Prices Influence Economic Sentiments

We’ve recently experienced some volatility in the oil market. Brent crude oil prices surged by 0.8% after news broke that India would not buy crude imports from Russia. This new bombshell moved Brent crude back over $62 per barrel, further pointing to the elevated geopolitical tensions that continue to roil energy markets.

Further, gold prices have increased, currently tracking well over $4,200 an ounce. The increase in gold prices can be used as an indicator of demand for safe-haven assets during economic downturns. This trend highlights some of investors’ deepest fears around inflation and currency devaluation that they are currently wrestling with.

This is especially the case considering the country’s high dependence on energy imports and gold’s historical function as a safe-haven asset during times of economic distress.

Sectoral Performance Insights

Sectoral performance reveals even more to the story of the UK’s economic landscape. Services became the main engine of expansion through much of this period, increasing by 0.4%. Construction output was down 0.3% for August, the second straight month of decreases and reflecting cracks in this important sector.

While the overall service sector continued to grow, the index of services was neutral, suggesting a softening in many areas. This discrepancy begs the question of sustainability and if recent progress can be upheld as outside forces start to crash into our progress like a roaring freight train.

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