Sterling’s sustained rally has gone into reverse today following the release of a string of weak UK macro data for December and January. The Sterling trade-weighted index, which yesterday hit its strongest level since early March, is currently down 0.5% since yesterday’s close, its largest daily fall since 4th January. UK macro data point to a severe double-dip in economic growth at the turn of the new year despite the government’s expansive and very costly fiscal policies.
According to preliminary data the UK composite PMI collapsed to 40.6 in January from a downwardly revised 50.4 in December. In level terms this was the weakest number since May while the 9.8 percentage point collapse in January 2021 is the biggest monthly fall since April. The manufacturing PMI fell “only” 4.6pp but the services PMI collapsed 11.6pp, unsurprisingly
perhaps as the critical UK service sector has effectively been mothballed since the third UK lockdown was introduced on 5th January. The volume of retail sales rose only 0.3% mom in December versus a consensus forecast of +0.9% mom. Moreover the November figure (-4.1% mom) was revised down from -3.8% mom. In level terms retail sales in December were still down 0.5% from July.
This does not bode well for UK GDP which had already contracted about 2% in October-November. GDP is likely to have risen only marginally in December before collapsing in January. This is all the more concerning as record government spending has resulted in a ballooning fiscal deficit. The Public Sector Net Borrowing Requirement (excluding public sector banks) surged to
£34.1bn in December, the biggest fiscal deficit since May. As a result the deficit in the fiscal-year to December 2020 was £270.8bn or 4.7 times higher than the deficit in April-December 2019.
