Lloyds Bank Corporate Markets Column: Underlying UK growth to remain subpar

THE Lloyds Business Barometer has signalled a growth slowdown for some months…..

The Lloyds Business Barometer is the best leading indicator of economic trends having, to our knowledge, signalled the recession and subsequent recovery before any other survey in the marketplace, even the well-respected PMI survey (chart 1). Our analysis shows that the Business Barometer leads the PMI survey by an average of 2 months and other surveys (e.g. CBI) by considerably more. This suggest that the latest January Business Barometer results will be reflected in the PMI survey in two months’ time.

The first official estimate of Q4 2010 GDP outturn was shockingly weak, exacerbated by the poor weather. After buoyant numbers for Q2 and Q3, the underlying picture of slower growth was something that the Lloyds Business Barometer flagged for some months (e.g. “Too early to rule out a UK double dip and further QE”, 5 November 2010).

…and it points to continued weak underlying growth in H1 2011

Indeed, the Lloyds Business Barometer now suggests that underlying economic activity (i.e. excluding any major weather effects) will remain weak in the first quarter of 2011 and the first part of Q2, raising questions about whether the majority on the MPC will really vote to raise interest rates as soon as May, as some are expecting.

The latest monthly survey shows that the net balance for economic prospects vs 3m ago fell back to 9% in January, after what seems to have been a temporary blip to the upside last month to 26%. 42% of companies were more optimistic (down 4 points) and 33% were more pessimistic (up 13%). The middle ground – neither more optimistic nor more pessimistic – fell 6 points to 23%.

The average net balance for the latest three months (Nov-Jan) was 14%, consistent a quarter-on-quarter growth rate of only 0.2% in the quarter ahead (Feb-Apr).

The industrial sector outperforms

The service sector has experienced a significant slowdown in activity in recent months, probably related to concerns about the impact of fiscal tightening. The net balance for economic prospects in the service sector has fallen to 9%, compared with 52% a year earlier. The distribution sector, which includes retail, has also fallen to 13% versus 39% in January 2010 – see chart 3.

In contrast, the industrial sector has been more resilient, with the net balance actually marginally higher by 1 point over the past year to 23%. This sector is now outperforming both the service and distribution sectors, raising hopes that the economy may be starting to rebalance away from domestic consumption in favour of external demand.

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