UK – Trending Up
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
It is very encouraging to note that the UK economy looks set to bounce back after a softer patch of economic data releases that occurred at the end of Q1 2018.
The Composite Purchasing Managers Index (PMI), based on survey evidence which asks companies about new orders, job hiring and inventories, has rebounded nicely. The Composite index acts as an indicator of future growth and is an amalgam of manufacturing, services and construction sectors survey data.
The figure for the Composite PMI had been forecast at 53 – any figure above 50 indicates expansion and under 50 suggests contraction – but the official reading was much higher, coming in at 54.5.
UK Composite PMI
Source: IHS Markit & Bloomberg, 31 May 2018
Soft economic data at the end of Q1 2018 had been mainly attributed to extreme weather conditions, the so called ‘Beast from the East’ and construction and retail sectors were hit hard during this time. The inclement conditions reduced footfall numbers in the high street and the dire effects also contributed to construction projects being held up.
In terms of the services component, which accounts for the bulk of UK economic growth and dominates the survey, results were also very strong. The reading was 54, up from 52.8, beating Bloomberg forecasters who had predicted a reading of 53. According to IHS Markit, who publish the indices, the readings are commensurate with economic growth of 0.3% to 0.4% this quarter. First quarter growth was just 0.1% so this is a very welcome turnaround. It is ‘back to business’ for the UK indicating we are out and about spending more and enjoying life.
The pickup in economic data will help build a more convincing case that the winter’s soft patch was temporary. However, the Bank of England (BoE) have acted extremely cautiously since the credit crisis. They do not want to take risks with growth, preferring to examine deeper issues to determine whether there are factors at work other than weather related effects.
The BoE resisted tightening monetary policy at its last meeting in May after inflation undershot expectations. Their hesitancy reflected in economists’ interest rate forecasts and at the moment they see a very slim chance of an increase in June, but a better chance of a hike in August.
Probability of Interest Rate Increase in the UK
Source: Bloomberg, 08 June 2018