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UK economy looks more positive for the second quarter

 
Michael Hewson
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Consumers Feel The Pinch With Christmas Around The Corner
UK economy more positive in Q2 (Source: Getty)

Last week European markets posted their first weekly loss since March, breaking a run of eight consecutive weekly gains, raising the prospect that we could be on the cusp of a period of consolidation after a run that has seen the FTSE100 run up from lows of 6,840 in March to a new record high of 7,903, a gain of over 1,000 points in less than two months.

There does appear to be some evidence of failing momentum which has prompted some chatter that now might be a good time to take some money off the table, adopting the well-worn cliché of “Sell in May and go away”

What is more surprising is that the recent gains have taken place against a backdrop of rising concerns that the slowdown in economic activity seen in Q1 of this year might not translate into a pickup in Q2.

Last week retail sales in the UK showed a big jump in April of 1.6% after the shocker of a number in March, which was skewed by the fact that half of the country ground to a halt as a result of the cold arctic blast from the “beast from the east”.

What was all the more surprising was the disagreement between the Office for National Statistics (ONS) and the Bank of England about the effects the cold weather had on economic activity in Q1. As a reminder these two organisations base their assessments on the outlook of the UK economy on fairly similar data sets.

As such it makes it that much harder to derive a view on the UK economy that is consistent and gives a decent steer on where the economy is heading.

The recovery in retail sales in April shouldn't really be all that surprising given that for the last 4 years a weak March number has been followed by a strong rebound in April, and it is quite likely that seasonality may have something to do with that.

The acid test will come with the May retail sales numbers and the picture here is much less clear, given recent rises in utility bills, council tax, as well as the sharp rise in oil prices which is likely to have filtered through into consumers’ pockets in the way of higher fuel prices at the pump.

One thing economists could do is take their heads out of their spreadsheets and look around them in terms of how May turned out in terms of the great weather over the bank holiday periods, as well as the impact of the Royal Wedding on retail spending.

Recent data from the CBI showed that the recovery in retail sales continued in May, after an improvement in April. This should bode well for a better Q2 for the UK.

Whether that translates into continued gains in the stock market is another matter, but overall as far as the UK economy is concerned Q2 is likely to be better than Q1.

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