Business surveys show modest improvement in Q2

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Overall, business surveys point to a slightly stronger (albeit still tepid) growth over Q2 so far, after a weak Q1. Meanwhile, retail sales saw a lift in May from the Royal Wedding and good weather, according to the CBI.

However, while real earnings are slowly recovering, they remain low by historical comparison, which is continuing to hit consumer-facing sectors hard.

The second estimate of Q1 GDP growth was left unchanged at 0.1%, disappointing hopes that some of the weakness at the start of the year would be revised away. Nevertheless, business surveys for Q2 so far point to stronger growth than in Q1, although are still consistent with fairly tepid momentum overall: notably, the CBI’s growth indicator picked up in the three months to May after output growth slowed to the weakest since September 2016 in the quarter to April.

The services PMI also picked up in May, with many service providers citing a catch-up from the snow-related disruption seen in Q1. The manufacturing PMI edged higher, although this was mainly down to the steepest build-up of finished goods inventories in the survey’s 26-year history, and a sharp reduction in backlogs of work. The May construction PMI signalled a modest improvement (unchanged from the April reading), after the PMI fell into contraction territory in March. Some firms cited that unusually good weather conditions had supported activity and enabled them to continue catching up after prior months’ weather-related disruption.

But official data for Q2 so far has been weak. Industrial production declined by 0.8% in April, the steepest fall since February 2017 (excluding December 2017, when a one-off shutdown of the Forties oil pipeline significantly dragged oil production). The reading was well below expectations of 0.1% growth, and well below average growth of 0.2% per month recorded over the last 12 months. Manufacturing output growth turned negative in April on a three-month-on-three-month basis (a better gauge of the underlying trend), for the first time since May 2017. However, prospects for the rest of Q2 look better: alongside the pick-up in the May manufacturing PMI, the CBI’s latest Industrial Trends Survey showed a strong pick up in output and order books in the three months to June.

In contrast, warm weather and the Royal Wedding celebrations supported retail salesin May, which rose by 1.3% on the month. Some of the pick-up in retail sales was also likely due to consumers having previously delayed purchases due to the cold weather in March. Nevertheless, conditions remain tough in the sector with real household earnings still weak historically, over-leveraging and deeper structural issues such as digital disruption.

Following three months of decrease, CPI inflation remained unchanged in May, at 2.4%, the joint-lowest since March 2017. However, only the transport component of CPI kept inflation from falling further – reflecting a combination of rising global oil prices, and the later timing of Easter this year distorting air and sea fares.

Nominal regular pay growth (excl. bonuses and before adjusting for inflation) was 2.8% on the year in the three months to April 2018, down marginally (by 0.1% pts) on March. Despite this softening in nominal wage growth, the falling inflation over April meant that real wages grew year-on-year for a second consecutive month on a three-month rolling basis. But real wage growth remains weak by historical comparison, which continues to put pressure on household spending.