Britain’s economy seems to run out of steam before full recovery

The UK’s statistics package released earlier today is a cause for caution. The epicentre of the recovery has shifted from manufacturing and construction to the service sector. Thanks to the opening of the economy, the service sector activity index added 3.4% in April after rising 1.9% a month earlier. The data came out better than expected but hardly outweighed the effect of the cooling in other sectors. Industrial production fell by 1.3% in April, while construction output fell by 2%.

Industrial production in Britain is adding 27.5% to last April. Still, there is little cause for optimism here as, in absolute terms, the index is 3% below levels for February 2020 and 6.5% below the local peak in March 2019. In other words, we see a renewed trend towards stagnation in the sector, probably caused by Brexit.

The same applies to the construction sector, where declines have occurred at levels below pre-pandemic levels. Thus, by and large, with still some spare manufacturing capacity, Britain is far from a “good” overheated economy. But this is not the case with the price indices, which continue to go up, exceeding pre-pandemic levels.

In our view, the published statistics for Britain present the Bank of England with a difficult choice: to fight inflation or to support economic growth. Over the last two decades, central banks in the developed world have predominantly opted for the latter. This makes us consider the difficulties of further growth in the pound. GBPUSD may form a top at levels near 1.4200 for many months to come if the Bank of England thinks similarly to the ECB.

The FxPro Analyst Team