January’s all-sector PMI provides the clearest sign yet that the economy has turned a corner and supports our view that the next move in interest rates may actually be up, albeit not until 2021.
Survey reaffirms post-election rebound
- January’s all-sector PMI provides the clearest sign yet that the economy has turned a corner and supports our view that the next move in interest rates may actually be up, albeit not until 2021.
- The upward revision to the IHS/Markit services PMI from January’s flash estimate of 52.9 to 53.9 was above the consensus forecast of 52.9 and our own forecast of 53.5. This meant that the rise from December’s 50.0 reading was the biggest since the immediate dip after the EU referendum was reversed in August 2016. The PMI now points to quarterly growth in services output of about 0.5% in Q1, a big improvement on November’s 0.1% 3m/3m gain.
- The forward-looking balances of the services PMI were even more impressive. The new orders balance rose from 51.2 to 54.7, a 19-month high. And the future activity balance jumped from 66.3 to 71.5, taking it to its highest since a year before the EU referendum in 2016. The pick-up in the employment balance from 51.1 to 52.0 is good news for the near-term prospects for consumer spending too – although productivity growth will clearly need to pick up if the economy is to grow robustly in the medium term.
- Meanwhile, the improvement in output appears to have given firms the confidence to pass on at least part of their higher labour costs. The prices charged balance rose from 50.8 to 53.8, its highest level in a year and a half.
- With the manufacturing and construction surveys also rebounding in January, the all-sector PMI picked up from 48.9 to 52.8. Indeed, all three PMIs have significantly turned up since December, with the services PMI well within expansionary territory, the manufacturing PMI suggesting that the sector is no longer contracting and the construction PMI not far off expansionary territory either. Altogether, the all-sector PMI is consistent with a 0.3% q/q expansion in GDP in Q1, up from a probable 0.1% q/q decline in Q4. (See Chart 1.)
- What matters now is if the actual GDP figures follow the survey data up. We wouldn’t be surprised if the rebound in Q1 GDP growth isn’t quite that strong. Just as the PMIs have been too downbeat over the year ahead of Brexit, they might now be too upbeat! But even if the PMIs prove a little optimistic, it looks a safe bet that the economy started to grow again at the start of this year. Like the Bank of England, we envisage GDP growth rising to +0.2% q/q in Q1. This and the prospect of a further lift to growth from fiscal policy in the Budget on 11th March will probably be enough to prevent the Monetary Policy Committee from cutting interest rates this year.
Chart 1: IHS Markit/CIPS All-Sector PMI & GDP
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org