UK Once Again Heavily Reliant on Services in Q3

This morning we’ll get some insight into how the U.K. economy performed in the third quarter and based on the data we’ve already seen for the period, we should not be expecting much from it. Manufacturing and construction, which make up around a fifth of the economy, have not performed well in the July to September period so are likely to drag on growth in the period.

Manufacturers are still facing tough headwinds from the slowdown in the global economy and the effect of the strong pound which makes them less competitive. While the impacts of the latter would pass in time, with central banks around the world still easing and the Bank of England still considering tightening, it’s likely to get tougher for exporters before it gets better so the sector could continue to underperform. Moreover, we are likely to see tighter fiscal policy in the U.K. in the coming quarters which is likely to weigh on the economy.

The only upshot here is that the services sector makes up more than three quarters of the U.K. economy and while the PMIs would suggest the sector is cooling, it’s still growing at a decent rate. With wages now growing at a good rate, this should be able to sustain growth in the sector and pick up the slack for the other parts of the economy that are struggling. The only downside is that the governments promise to make the country less reliant on services is clearly not going to plan and it seems we’re more reliant on the sector than we’ve ever been before.

U.S. data being released this afternoon includes core durable goods orders for September, a good indicator of current activity and growth expectations, services PMI data for October and the latest CB consumer confidence reading. With the consumer being so important to the U.S. economy, there should be a big focus on this data although it’s unlikely to influence tomorrow’s FOMC announcement which could affect its impact on the markets today.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.