We have seen strong coincident activity in the UK in recent months, helped in part by a government-engineered boost to the housing market, which has lifted consumer spirits and caused retail sales to surge. Our leading indicator anticipated this upturn in the economy, and it continues to see no blots on the horizon (ie over the next 6 to 9 months), although this month it has leveled off slightly rather than continuing to climb.
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Starting to weigh a little on the indicator is the resilience of sterling, which in trade-weighted terms is up over 7% since last summer. Overall, we question the durability of the UK recovery. So far it has been largely based on similar conditions to those which preceded the last financial crisis. Forward guidance – increasingly becoming fuzzier – has encouraged more consumer lending, with eg credit card lending surging. However, worryingly, there has only been a tepid recovery in lending to businesses.
Standing back, there are still several elephants in the British room. First is that industrial production remains mired at 1992 levels. Second, is the UK’s current account deficit is the largest in the developed world after the US’s and, with the income balance falling, is showing signs of becoming increasingly structural.