It was looking as if the second quarter of this year was going to be much better for UK plc, but then along came data that seems to contradict that view.
The first quarter of 2017 saw the UK economy grow at just 0.2 per cent, making it the worst performing economy of the G7. Was a this a sign that the UK was paying a price for Brexit? Or was it merely a reaction to several quarters in a row when the UK performed better than most other G7 countries?
The data for April and May was encouraging until today (June 5th).
The latest purchasing managers index (PMI), tracking services fell to its lowest level since February, with the Business Activity Index falling to 53.8, from 55.8 in the previous month.
The data rather spoilt what was looking like an encouraging trend, the PMI tracking UK construction jumped to its highest level since 2015 – 56.0 while the PMI for manufacturing was just a fraction lower than April’s three year high.
Markit, which compiles the data, said that the three indexes were consistent with growth of 0.5 per cent in Q2. So that is okay, better than in Q1, but to put that in context, the PMIs for the euro area, did much better.
The composite PMI for the euro area rose to 56.8, the best showing in six years, consistent with a 0.7 per cent growth rate.
If the PMIs are any guide, and most economists say they are, and unless June turns out to be much better for UK plc, then for the second quarter in a row, the euro area is set to outperform the UK.
Scott Bowman, UK Economist at Capital Economics, chose to emphasise the possibility that inflation has peaked, saying that sub-indices tracking UK input and output prices fell to eight and six month lows – respectively. He said: “This supports our view that the recent upside surprises in CPI inflation reflect faster rather than a larger pass-through from sterling’s depreciation than has historically been the case. . . With the rise in the all-sector future activity balance suggesting that the pace of growth in May can be maintained in the coming months, we are sticking with our forecast of 2.0 per cent GDP growth for 2017 as a whole."
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics was less optimistic. He said: "The services PMI does not include the retail sector, which is at the sharp end of the consumer slowdown. Although retail sales picked up in April, surveys from the CBI and BDO signal a disappointing May. For now, then, we see little reason to think that the economy has strengthened materially in Q2.”