UK manufacturing appears to be booming, the services sector has got problems.
The penny still hasn’t dropped in most quarters. 2017 was not a good year for the UK economy, it was a very promising year for the US and euro area.
Last year, the UK was the outlier, it was the G7 country that really struggled.
It could be a timing thing, of course. The economic cycle turns this way and that. In 2015 and 2016 this timing favoured the UK; in 2017 it didn’t.
But usually, for the UK, when its main trading partners are doing well, the UK does well. Some economists leap in at this point and say that the UK did better than many Remainers predicted before the EU referendum. But put the UK performance in the context of how other countries are doing, and the conclusions are unambiguous.
But what about the final quarter of 2018? We will have to wait a few more weeks to get the official data, in the meantime we have the purchasing managers indexes, or PMIs.
For the US and euro area, the readings were exceptional. The PMI tracking euro area manufacturing is at an all-time high, for example. In the US it is at a 13-year high.
Markit, which compiles the PMI data for the euro area, says that the data is consistent with quarterly growth of 0.8 per cent in the final quarter of 2017.
In the UK, manufacturing appears to be enjoying a strong recovery, the PMI fell a tad on the month before, but then the index from the month before saw the highest reading for some time. It seems that the main impetus is coming from exports. There is more good news, input and output costs are not rising so fast.
The PMI tracking construction was not so strong, it too fell a tad on the month before but from a much lower level. The index points to what Markit described as “moderate expansion.”
But in the UK, the services sector is vital – it makes up the lion’s share of the economy. And the PMI tracking services, the Business Activity Index, had mixed results. Sure, the headline reading rose to the second highest level since April 2017, but a sub-index tracking new orders fell to a 16-month low.
Put the three PMIs together, and Markit projects that the UK grew at between 0.4 and 0.5 per cent in Q4.
That marks an improvement:
The story of 2017 seems to be as follows: Post Brexit falls in sterling led to falling real wages, hitting consumption. Brexit related uncertainty led to modest investment. As a result, growth in GDP was modest. By the end of the year, the falls in sterling were beginning to have a positive effect on exports, boosting manufacturing.
In 2018, the one-off effect of falls in sterling will work their way out of the system, helping real wages. Exports will rise, at last benefiting from the falls in the pound. However, the oil price has risen sharply in recent weeks, if this continues, inflation will receive another knock and real wages will continue to fall.
For the UK, 2018 should be better than 2017, but not by much. Meanwhile, the US and euro area are nicely poised for robust expansion.