Further signs of recovery in the UK service and manufacturing sectors, alongside a recent upturn in housing market activity, have prompted our panel to upgrade its 2013 GDP forecast this month. The services sector ended Q2 in stellar fashion, as the PMI leapt to a 27-month high of 56.9 in June, from 54.9 in May. Moreover, new orders in the sector rose at their fastest pace since June 2007, signalling that the improvement in the overall index is likely to be sustained. Meanwhile, PMIs for manufacturing and construction remained above the expansionary 50 threshold in June, climbing to 52.5 and 51.0, respectively. Industrial production, though, stagnated in m-o-m terms in May following a downwardly-revised 0.1% contraction in April. Still, many observers predict that Q2 GDP will surpass the 0.3% (q-o-q) expansion recorded in Q1. However, real disposable income plunged by 1.7% (q-o-q) in Q1, and while retail sales rebounded by 2.1% (m-o-m) in May, domestic demand could hamper activity going forward. Consumers have been hit by government spending cuts while inflation continues to outstrip wage growth. The CPI reaccelerated to 2.7% (y-o-y) in May from 2.4% in April. External headwinds also pose risks to the recovery, and depleted Euro zone demand was highlighted in the goods and services trade deficit widening from -£2.1bn in April to -£2.4bn in May.
Monetary policy was left unchanged earlier this month at Mark Carney’s first MPC meeting since he started his role as governor of the Bank of England on July 1. However, in contrast to the US Fed, the BoE signalled that it would continue to adopt a broadly stimulative stance by maintaining record-low interest rates for an extended period of time.
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