More Positive Clues for U.K ahead of the Weekend as the Services Sector Continues to Expand

It is indeed a pleasant end for the U.K.'s week, with the final major clue from the second quarter assuring that the headwinds are easing, and the contraction has slowed in the three months running to Jun; offsetting the abysmal downside revision to the first quarter's contraction, the deepest in almost half-a-century.

The joy today was from the thumping heart of the U.K economy, the services sector, where CIPS Purchasing Manager's Index, based on a survey of nearly 700 companies; showed yet another consecutive monthly expansion. The survey that takes the 50 barrier as the base gauge, separating growth from contraction was printed at 51.6 in June, almost unchanged from 51.7 in May, which was the first month the sector had expanded, since April of last year.

Indeed it is good news to see sings of the bottoming of this severe recession, though despite the two consecutive months of expansion, I for one do not take them for granted, as solid signs of reversal for the sector, and the economy. Especially, as this sector accounts for nearly 75%, on the national outcome. Basically, the sensible scenario for the sector is for the index to linger around the 50 barrier in the coming months, as surely a strong bullish burst now is unlikely and not sound based on the other reported fundamentals from the economy.

With rising unemployment, subdued demand and rapidly appreciating sterling; U.K's economic recovery will not be seen this soon or as rapid as what the services PMI might force some to expect. I expect a long period of stagnation, - which is based on exclusion of deflationary threats for now- meaning growth in sectors to be seen in the latter half of this year that it has just stepped into, is likely to be anemic!

The silver lining though, is that the economy is responsive to the measures taken to rest the economy ashore. Where rates are lingering at their historic low of 0.5%, and the BoE has extended with their quantitative easing measures, by allocating 125 billion of newly printed money to bond purchases. The aim was to increase liquidity, help stimulate the economy again, and help offset deflationary threats as well, which continue to rise day by day! Next week, the BoE is announcing their rate decision, and the above mentioned measures are expected to be voted, yet again unchanged!

Surely, the effects of those measures are starting to be seen; as this week alone, it was merely a recap to the difference from the first three months, compared to the second quarter. The GDP which was revised lower to 2.4% contract and most probably half, in the second quarter.

Confidence is improving; markets have stabilized further, the housing freefall eased, sectors are starting to resume their path gradually, and slowly to grow as their contraction slowed, while consumer demand is finding a base; yet still remains one of the weakest aspects, as household finances continue to be low with the weak labor market.

Assessing simply the figures we saw today, in the fist quarter, Britons continued to be sensible under the strains of this recession, as they are managing their finances, taking advantage of those rough times. They are surely limiting their spending and increasing their savings, yet we can see they also are committing to their obligations.

Britons paid back record mortgage debt in the first three months of the year; the most since records were kept in 1970. According to the BoE data, Britons paid a net 8.1 billion pounds, as they added to their housing equity by paying down their mortgage debt. Though the data can be looked at from both ends, it shows that at least the liquidity crisis which lenders have lived through will ease.

According to the BoE's second quarter Credit Conditions Survey, the situation has improved in the second quarter, yet Britons are still not very eager to schedule new mortgages or interested in re-mortgaging; despite that, the survey showed that the availability of liquidity has improved for secured loans, whether for non-financial companies, for mortgaging or even for individuals. Still, as they see it moving forward in the third quarter, still delinquencies are expected to rise, even the outlook was more downbeat that the first quarter.

Though not to bother you with the details of this survey, the overall content was to rather bright to me, and with the BoE measure extending into the third quarter and their effects starting to further materialize. We can say for sure, that the worst of the credit crisis on U.K is indeed over, and the conditions seen now are accommodative with this deep recession that we have fallen into, rather than JUST shortage of liquidity and now as the recession, eases the liquidity to resume gradually, with the economy taking this protracted consolidation period to set the records straight, after this crisis rippled the imbalance across the economy and all its sectors!

Stability is starting to be seen, proving that the first quarter was at the bottom of this predicament. Financial markets are still fragile and the economy is not in recovery but on the right path to it, and now hurdles continue to be in the way; especially deflation, yet all in all the outlook is much better than it was in the beginning of the year, and the latter half will prove to be a delight compared to where we were like at this time, last year.

Volatility is an assured sentiment in markets now, especially equities that we have seen once rally and the other enter a sell off. Yet, of a bullish market to set its foundations, it surely needs to be parallel with solid fundamentals and the rally did indeed precede that! FTSE today was swinging between gains and losses, as in the latter half of this week's session the benchmark index was up by 30.26 points or 0.70%; at 4264.30 (13:47 GMT), where the losses for raw materials and energy producers was offset by gains for media companies, where the index was off by nearly 0.3%; earlier into the session nearing to the end of the week, almost unchanged.

Another week is laid to rest dear reader, enjoy your weekend as next week we have a rate decision to wait for…

Ecpulse

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