UK labor market remains strong, but investors focus on Brexit

Markets shrug off economic date as Brexit intensifies

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Economic data from the UK is resilient, but the broader Brexit developments overshadowed the data. Investors brushed aside the somewhat positive economic data amid rising concerns that the UK might not clinch a Brexit deal ahead of the March 2019 deadline.

Last week, data from the UK’s Office for National Statistics showed that wages increased at the fastest pace in a decade during the three months to October period. The data underlined the fact that real wage growth might finally start to become sustainable.

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It’s all about the wages!

Average wages including bonuses increased by 3.3% on an annualized basis. This was the most significant increase since the July period of 2008. The median forecasts expected to see just at a 3.0% increase.

Wages excluding bonuses grew at a pace of 3.3% which also marked the most significant increase since November 2008. However, questions remain if the UK’s economy will be able to maintain this pace in wages amid the Brexit uncertainty building up.

A Brexit deal could potentially confirm that real spending growth could rise to around 2.0% by next year from the current 1.6%. However, a no-Brexit agreement could cut off 0.3% point from consumer spending by next year.

What about employment?

Employment change grew 79,000 in the three months to July period to 32.48 million which was a record high. The UK’s employment rate was the highest at 75.7%. This was the highest level since 1971 when record-keeping began.

The number of people unemployed increased by 20,000 to 1.38 million during the three months to October 2018.

The UK’s jobless rate is holding steady at 4.1% as forecast by economists.

The GDP is stalling

Despite the upbeat numbers on the employment front, the UK’s economy is stalling. Earlier in the week, data showed that growth slowed during the three months to October.

The decline in the GDP came due to a sharp slump in the car sales and manufacturing sector is stagnating. This occurs due to the uncertainty on the Brexit deal.

The gross domestic product increased at a pace of 0.4% during the three months to October period. This is a much slower pace of increase compared to the 0.6% increase during the three months ending September. The October GDP was in line with the median estimates. On a month over month basis, GDP increased 0.1% in October compared to a flat reading in September.

Contributing to the GDP was the services sector which rebounded with a 0.2% increase in growth during October. Manufacturing sector contracted 0.9% while construction sector fell by 0.2%. Combined, the data lead to a 0.6% decline in production overall for October.

On a year over year basis, economic growth remained steady at 1.5%, unchanged from September.

The latest GDP reports continued to show the effects of prolonged uncertainty due to Brexit and raising investor concerns. A separate report showed that the trade deficit had widened to 11.87 billion GBP in October. This was an increase from September’s deficit of 10.68 billion GBP.

Trade deficit

The total trade deficit, as a result, increased to 3.30 billion compared to 2.33 billion in September. The median forecasts expected to see a deficit of 1.27 billion.

For the third quarter, the trade deficit is lower by 6.9 billion to show a deficit of 9.87 billion.

Investors shrugged aside the economic reports last week as Brexit once again came to the forefront. The British Prime Minister Theresa May scheduled to hold a parliamentary vote on December 11th. However, she called off the vote at the last minute and headed back to Brussels to renegotiate the bill.

Further drama followed as PM May’s conservative party called for a no-confidence vote. Ms. May managed to win with a majority vote of 200 – 117. Further Brexit negotiations are expected to continue with the Brexit talks now likely to be dragged into January 2019.

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