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Some people are never happy.
The results of IHS Markit’s latest survey of the UK’s services sector were released this morning, and the better-than-expected reading completed a hat-trick of strong results from surveys across the economy this week.
However, separate data released by the Bank of England this morning were less positive, and many economists appear unconvinced by the upbeat PMIs. Here’s fastFT’s roundup of what people are saying:
Taken together, this week’s PMI surveys imply a strong quarterly economic growth rate of 0.6 per cent. IHS Markit’s own economists acknowledged that such a strong rate is unlikely to be maintained, but analysts at Barclays went a step further, remaining convinced that growth will slow further after disappointing first-quarter figures released last week:
While we acknowledge the strength of April, we refrain from reading too much into it long-term. The positivity in the UK April PMIs is consistent with positivity in the euro area. Likewise, for the UK at least, much of this has been driven by business-to-business, offsetting weakness from consumer spending. Firms are nonetheless cautious about the sustainability of this given continued elevated Brexit uncertainty as well as rising inflation which will further dampen consumer spending during the course of 2017, represented by the decline in the business expectations index. In our view, concerns will only amplify throughout the course of 2017 as negotiations between the UK and EU27 begin. Overall, despite positivity in April PMIs, given monthly volatility, we believe that Q2 17 PMIs will ultimately confirm further softening in the UK economy, contrasting with the current Markit PMI estimate of 0.4% to 0.6% q/q.
Pantheon Macroeconomics’ Sam Tombs also pointed out that the services PMI does not cover retailers, which have been showing more signs of being affected by rising inflation. He added that data on mortgage approvals and unsecured consumer borrowing provided further evidence of a slowdown.
Money supply data continue to signal that the economy’s momentum seen immediately after the Brexit vote has ebbed away this year. Households’ money holdings increased by just 0.2% month-to-month in March, below the 0.4% average of the previous six months. This brought down the year-over-year growth rate to a 14-month low of 4.8%, from 5.4% in February.
Growth in unsecured borrowing likely will fade from March’s still-strong rate, helping to ensure that consumer spending takes a backseat in driving GDP growth this year.
The number of new mortgage approvals fell below 67,000 in March, according the the Bank of England, the second month in a row of worse than expected falls.
Sam Hill at RBC Capital Markets was similarly unimpressed, despite acknowledging “it was a strong month across the board”:
For now, we are reluctant to chase the signal from the PMIs, as we anticipate that the signs of the consumer spending slowdown seen in Q1 2017 are set to remain a feature of the economic outlook. Furthermore, whilst the news from the PMIs was generally positive, we do note that in the service sector the business expectations index fell significantly from 70.1 to 67.2, and is now 0.7 standard deviations below its long-run average. Some may be inclined to interpret the better news from the April PMIs as a potential sign that the Q1 slowdown in GDP growth to 0.3% q/q was just a blip, but we remain more circumspect at this stage.
However, not everyone was so negative, with Berenberg’s senior UK economist Kallum Pickering feeling more bullish:
UK demand is holding up well, with the improving international backdrop offsetting the normalisation in domestic demand after a surge in late 2016
While downside risks to near-term demand from Brexit uncertainty and rising inflation should be watched carefully, almost a year of data shows that these risks have failed to materialise in any serious way. Meanwhile, underlying fundamentals point to building inflationary pressures unrelated to the temporary inflationary effects of the depreciation in sterling since the Brexit vote.
Citi’s European economics team also said there were positive signs that the beginning of the Brexit process and the upcoming election “are not affecting business sentiment so far”, though they expected it to have little impact on the Bank of England:
The PMIs had a mixed predictive performance in recent quarters, so MPC members are likely to seek more evidence that the Q1 growth slowdown was just a blip before re-considering their stance. Their focus is on consumption and wage data, which has been weak recently. However, any positive UK economic data could boost Brexit hardliners and may make achieving early progress in the negotiations with the EU more difficult.
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