The continued strength of the PMIs in February proves that the surge in January wasn’t a flash in the pan and gives us confidence in our view that economic growth will pick up in the first quarter.
Sustained strength of PMIs confirms economy has turned a corner
- The continued strength of the PMIs in February proves that the surge in January wasn’t a flash in the pan and gives us confidence in our view that economic growth will pick up in the first quarter.
- The unchanged composite PMI reading of 53.3 (consensus 52.8) is consistent with quarterly growth of 0.4% in Q1, above our forecast of 0.2%. Either way, it’s clear the economy has improved relative to the stagnation in Q4 2019. The unchanged reading was due to a rise in the manufacturing output balance (from 50.1 to 52.8) being offset by a small fall in the services PMI (from 53.9 to 53.3, consensus 53.0).
- The headline manufacturing PMI also rose, from 50.0 to 51.9 (consensus 49.8, CE 51.0). But this wasn’t as strong as it looked. Around half of the rise was due to a sharp fall in the supplier’s delivery balance. (See Chart 1.) Longer delivery times boost the PMI as they are usually a sign of strong demand. But on this occasion, it is because factory shutdowns due to the coronavirus are preventing firms obtaining some parts, which could drag down output in the coming months. (Note the composite PMI is calculated from the manufacturing output index, not the headline manufacturing PMI, so it is not affected by this distortion.)
- Meanwhile, the government recorded a surplus in January as usual, due to the receipt of self-assessed income and capital gains taxes. But the surplus was £9.8bn in January this year (consensus £11.4bn), down from £12bn a year earlier. (See Table 1.) The January figures put the deficit on course to be £44.1bn (2.0% of GDP) this year, up from £38.4bn (1.8% of GDP) last year. While the current fiscal rules, set by the previous Chancellor Sajid Javid, would still allow a large rise in public investment, the rise in the deficit makes the ambition of balancing the current budget deficit more restrictive.
- The continued strength of the PMI confirms improved sentiment has helped the economy turn a corner at the start of this year, and a new Chancellor who is more of a fiscal dove than his predecessor should mean fiscal policy reinforces the recovery in economic momentum. That’s why, despite the external headwinds of weak growth in the euro-zone and the industrial shutdowns in China, we think quarterly growth will pick up throughout the year eradicating any reason for the Bank of England to cut rates.
Chart 1: Manufacturing Suppliers’ Delivery Times Balance
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
Current Total Spending
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com