The UK economy appears to be recovering since its disappointing first-quarter performance, but the pound remains materially lower today than at any point seen during the financial crisis of 2008-09.
Sterling's rally on Thursday following strong retail sales data was a long time coming for many investors as economic measures for the start of the second quarter have generally put the 0.3% gross domestic product growth of the first three months in the shade.
Second-quarter pick up
Let's take a look at the evidence from this week alone:
- Tuesday: Inflation, long stagnant during the years following the crisis, is now above the Bank of England's 2% target rate, climbing to 2.7% in April and forecast by the Bank to peak at 2.8% in Q4
- Wednesday: Unemployment hits a record low of 4.6% in April; wage growth rises 1 percentage point to 2.4%
- Thursday: Retail sales growth rises to an annual 2.3% in April, following a dismal 1.4% contraction in the previous month
What do the data tell us?
Consumer prices are rising thanks to a strong labour market and rising retail sales.
Recent survey data from purchasing managers in manufacturing, services and construction industries show that confidence is not limited to the consumer. Inventories are rising and the outlook for most managers is improving.
The main stumbling point is wage growth. A 3 point gap between inflation at 2.7% and annual wage growth at 2.4% has developed.
This will eventually put a strain on households and reduce their spending power.
"Britain’s labour market is pulling workers in opposing directions – more jobs are being created but both productivity and real wages are falling," says Mariano Mamertino, EMEA economist at global job site Indeed.
What this means for sterling
Economic growth leads to investment growth which supports a country's currency.
Strong growth compels a central bank to be wary – too strong and inflationary and market bubbles form then burst, bringing economic growth to a stumbling halt.
The central bank's main line of defence is interest rates. Higher rates help cool inflation and support prolonged and smoother economic growth, which in turn supports the currency.