By: Dr. Mike Campbell
The UK economy suffered a surprise contraction in the final quarter of 2010, shrinking by 0.5%. If the Q1 2011 data follows suit, then the UK will have entered recession and the “double-dip” doomsayers will be proven correct. However, a couple of figures that have emerged for last month (January) which bode well for the economy and have lifted the value of Sterling against other majors.
The UK construction sector is vital to the economy as it contributes some 8% to the nation’s GDP figure. A slowdown in the sector was blamed for the surprisingly poor Q4 data. The UK endured one of the coldest, snowiest Decembers for a very long time in 2010 and this was seized upon by proponents of the coalition as one reason to explain the economic contraction. The January Markit/CIPS UK Construction Purchasing Manager’s index rose to 53.7 from a value of 49.1 in December. Any value above 50 is indicative of growth in the sector. Analysts had expected the index to come in around the 50 mark, so the actual value shows much stronger growth than anticipated.
Another Indicator
The second economic indicator that has helped to buoy the pound is the manufacturing purchasing manager’s index. The January figure can in at 62, up from 58.7 the previous month. This represents the best performance since records began in 1992.
These two indicators were partially responsible for pushing Sterling to its highest value against the Dollar since November. The data also suggested that raw material prices were rising which will stoke inflation. This led to renewed speculation that the Bank of England will be forced to raise interest rates to attempt to control inflation. If that were to happen, it would send Sterling higher since it is a stable currency and higher interest rates would attract investment. The jury is still out on that.