Eco Analysis - UK economy shaping up for a strong Q2 (H. Amourda, B. Hilliard)

Eco Analysis - UK economy shaping up for a strong Q2 (H. Amourda, B. Hilliard)

Very few data were released today. Spanish registered unemployment change declined by nearly 98.3k people ahead of the summer. In the UK, the BRC survey points to a rebound in sales in May while the construction PMI rose to 50.8 from 49.4 on the back of a strong jump in the housing component. On Wednesday, we expect the May services PMI to post some strong gains in Spain and Italy, while the divergence between the euro area and the UK should pause in May.

■ Spanish unemployment change declines ahead of the summer

The number of Spanish “registered unemployed” has dropped by roughly 98.3k in May following a previous drop of nearly 46k in April. However, when looking at the seasonally adjusted “registered employment” figures that are released in the same report by the Spanish ministry of labour, the outlook is less positive as the number of employed people increased by only 5.7k. As we have highlighted in Spanish unemployment heading even higher, the Spanish labour market has a high share of temporary contracts compared with other euro area countries. Looking ahead, we maintain the view that unemployment in Spain will break above 30% by 2015.

■ Big jump in housing component of the UK construction PMI.

The total rose from 49.4 to 50.8 in May. There were improvements in all three categories. Housing 51.2 to 54.4, commercial 46.9 to 48.2 and civil engineering 45.2 to 47.5. New orders rose from 49.0 to 50.4. We had expected housing to be the best performer and that should continue to be so in the months ahead. The Funding for Lending Scheme has boosted mortgage availability (although the increase in mortgage approvals to date has been miserably weak) and the government has launched the Help to Buy scheme. Whilst the big part of that scheme does not start until next year, house builders will be anticipating a sizeable increase in demand and so will be responding now. Just look at the share price of the major builders to confirm that.

Whilst the correlation between the PMI and the official construction data is low, at the very least the PMI suggests that construction will not be a drag on GDP in Q2 (as it was in Q1).

■ The UK BRC retail survey published overnight showed a strong bounce in sales growth in May

The headlines and the calendars only report the like for like growth figures which adjust for increases in the amount of floor space (-2.2% yoy to +1.8% yoy ). The measure relevant for retail sales is the growth in total nominal sales which bounced from -0.6% yoy to +3.4% yoy. That points to a very large bounce in the volume of sales in May of more than 1% mom.

Let's wait for the services PMI tomorrow but it looks as though the UK economy is shaping up for a healthy increase in GDP growth in Q2 from the 0.3% recorded in Q1.