UK slowing down? - Nomura

Analysts at Nomura explained that while far from a collapse, there have been increasing signs that the UK is slowing down – whether it be retail sales, household income, employment and surveys of output. 

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Key Quotes:

"Economic activity: Our forecast remains unchanged for economic growth to slow from the fastest in the G7 in 2016 to 1.8% this year and 1.5% next. Past strength in official data will carry over into the start of 2017 and has been responsible for upward revisions to consensus forecasts. But the outlook has darkened with a number of key indicators now showing signs of softening (the Nomura Surprise Index for the UK is now well off its peaks). The composite PMI is a perfect example. At just under 54, it points to growth of close to 2%, but it has weakened over the past two months by more than the PMI of any other country (down by nearly three points). We continue to think the biggest downside risk to our view relates to consumer spending. Nominal income growth has already fallen and real incomes are set to be squeezed further as prices respond to the fall in sterling. 

Inflation: In fact, CPI inflation has risen to 1.8%, an increase of 1.25pp over the past six months. From an accounting perspective, by far the most important contributors to that rise have been transportation (primarily petrol prices) and to a lesser extent food. Core CPI components have, thus far at least, added relatively little to overall inflation but are expected to do so as lower sterling slowly feeds through. Indeed, currency moves seem to have their most powerful effect on core inflation only after two to three years. As a result, we expect CPI inflation to rise to a peak of around 2.75% by the end of this year/start of 2018 before gradually moving back towards its target in 2019. Fiscal policy: From a macroeconomic (though not political) standpoint the government’s March Budget was a non-event, with the Chancellor loosening the fiscal reins only very modestly in the near term only to claw it back further ahead. The Treasury’s caution was understandable following the far more significant loosening in policy delivered just four months ago in November’s Autumn Statement. A stronger economy and better-than-expected deficit outturns led the Debt Management Office to lower Gilt issuance in 2017- 18, though not as much as we had expected thanks to cuts in the T-bill stock. 

Monetary policy: With Brexit on the horizon (PM Theresa May is expected to trigger Article 50 this week, parliament permitting) and the economy showing signs of easing, we do not expect any imminent policy tightening from the BoE. But nor do we expect further easing, with higher inflation likely to broadly offset weaker growth in terms of the MPC’s judgement of the appropriate policy stance. Governor Carney has said in the past that it would be the Bank’s intention to keep its asset purchase holdings unchanged at least until interest rates are at levels from which they can be materially reduced. With the market's pricing in just 20bp per year of monetary tightening over the next five years, we expect the Bank to continue reinvesting QE redemptions (the next one is in August)."