UK manufacturing is in the doldrums. Picture by Kirsty O'Connor / Treasury
The British Pound fell after a surprise decline in UK economic output in May.
The UK has recorded two consecutive monthly declines in economic output, which is weighing on Pound exchange rates.
The Pound to Euro conversion fell to 1.1547 in the hours after the ONS said UK GDP contracted 0.1% month-on-month in May, up from -0.3% in April, but below consensus expectations that expected a return to growth at 0.1%. The Pound to Dollar conversion dropped to 1.35 by the time U.S. markets opened for the day.
"GBP is down 0.3% vs. the USD and trading heavily in response to the release of weaker than expected data, including an unexpected contraction in monthly GDP, a worrisome decline in industrial production, and a wider than expected trade deficit," says Shaun Osborne, Chief FX Analyst at Scotiabank.
Industrial production's collapse extended: -0.9% m/m recorded in May, down from -0.6% in April and below an optimistic expectation for a flat 0% to be printed.
Manufacturing production was even worse: -1.0% m/m in May, down from -0.9% and below expectations for -0.1%.
Helping the economy was the services sector, the UK's largest, which managed to eke out growth of 0.1% in May, led by strong growth in information and communication (+2.0%) and legal services (+6.1%), offsetting declines in retail (-2.7%).
Financial markets think these data will make a quickening in the pace that the Bank of England cuts interest rates more likely, which explains the decline in the Pound.
Above: GBP/EUR at daily intervals.
"Having gone from albeit surprisingly strong growth in the first quarter, the UK economy is struggling once again. Following a poor reading in April, the data from the Office for National Statistics today shows another fall in May of 0.1%, as businesses continue to get to grips with increased costs and consumers deal with the associated lack of confidence," says Lindsay James, investment strategist at Quilter.
The data comes at a time of rising concerns about the outlook for UK public finances, with tremors in the debt markets signalling that the UK's debt is running out of control.
Chancellor Reeves desperately needs growth to drive up the income the government receives in taxes. Without it, she will need to raise the rate of tax, which could further compound the growth slowdown.
"Budget speculation, as a result, is ramping up with the government expected to raise taxes again in order to replenish the public coffers. But the associated impact this will have on economic growth cannot be forgotten," says James.
Ben Jones, Lead Economist at the Confederation of British Industry, says flatlining growth in May highlights the ongoing pressures facing the UK economy, with manufacturing and retail struggling, alongside a patchy performance across other parts of the services sector.
"Today’s data suggests that a sluggish recovery remains the likeliest path in the near-term amid persistent trade uncertainty, a loosening labour market and slowing growth in real incomes. And with business costs rising, many firms are maintaining a cautious approach to investment," he says.
Jones says Reeves must provide clear reassurance that there will be no new taxes on business and instead offer a commitment to work alongside firms to dismantle barriers to growth.