- U.K. retail sales, manufacturing activity, and the services sector show strong growth.
- The Bank of England signals greater willingness to raise interest rates to tame inflation.
- Tensions rise between the U.K. and the EU over goods and border control in Northern Ireland.
In the United Kingdom, it is truly a reopening story. The economy is showing signs of stronger growth as consumers spend, factories ramp up production, and services rebound — all driven by the easing of lockdown rules and vaccinations.
An upswing as consumers splurge
The sectors that were expected to do well with reopenings have been booming. Retail sales surged in April. Online sales rose, but food purchases declined as people started to dine out. Since the United Kingdom did not have waves of fiscal stimulus, real retail sales did not have unusual bumps during the pandemic. Sales moved in line with the mobility restrictions.
In May, the purchasing managers' index (PMI) for manufacturing and services was a bit of a surprise. A deluge of new orders, along with global supply issues, helped to drive a record increase in manufacturing, which outperformed the services sector. The IHS Markit/CIPS UK Manufacturing PMI rose to 65.6 in May from 60.9 in April. The sector's employment growth also picked up. While activity in Britain's service industries grew last month, the increase was less than expected due to the gradual approach to reopenings. The sector might have been affected more than manufacturing by the different stages of reopenings. The IHS Markit/CIPS UK Services PMI rose to 62.9 in May from 61.0 in April.
The fourth and final stage of easing lockdown restrictions is still ahead. In mid-June, Prime Minister Boris Johnson delayed a much-awaited end to Covid-19 restrictions by about one month to July 19. The curbs were due to be lifted on June 21. The pause comes amid rising cases, driven by the more transmissible Delta variant, which was first identified in India.
Central bank may turn hawkish on rates
The Bank of England (BoE) has signaled a more hawkish tone on interest rates. The BoE's deputy governors Dave Ramsden and Jon Cunliffe warned against the record increase in home price inflation. Ramsden said there is a risk that demand increases before supply is available, which could lead to a more generalized pickup in inflationary pressures. Cunliffe was also worried about the rise in personal debt. But Gertjan Vlieghe, the most dovish member of the central bank's Monetary Policy Committee, said the central bank is more likely to wait until later in 2022 to raise rates.
The BoE has indicated that rate increases are going to be their first choice when it comes to tightening monetary policy. A key uncertainty for the United Kingdom is the post-furlough labor market. It is not clear how the labor market and economic activity will transition from the furloughs. Even if there is policy tightening, hiccups in the labor market could prevent a rapid pace of rate hikes.
Politics in Northern Ireland
Tensions between the United Kingdom and the European Union have escalated over the implementation of the Northern Ireland Protocol (NIP). In March, the U.K. unilaterally extended the grace period governing checks on certain goods; the EU called it a breach of international law. Negotiations have been held between both parties since the U.K. delivered a road map outlining the implementation of the NIP.
Northern Ireland politics seems to be complicating matters. The new leader of the Democratic Unionist Party (DUP) has argued the NIP is damaging the economy and needs to be removed. Political unrest in Northern Ireland has worsened since the start of this year, and there is resentment toward the NIP's full implementation. Given the rising tensions in Northern Ireland, the EU may be willing to compromise, but this is unlikely to be a smooth process.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.