MENU

UK Economy Seen Flat-lining in Final Quarter as BoE Rate Cut Draws Closer

© Adobe Stock

- PMI surveys again point to economic contraction in Q4.

- But economists say they're still underestimating growth.

- Pantheon Macroeconomics looks for Q4 growth of 01%.

- Before a 2020 rebound takes hold on ratified Brexit deal.

- Others warn more weakness could augur BoE rate cut.

The UK economy is likely to have stalled in the final quarter, according to the latest IHS Markit PMI surveys, which suggested both manufacturing and services industries shrank in December and led economists to warn the Bank of England (BoE) could cut interest rates if growth doesn't pick up soon.

IHS Markit's flash PMI surveys pointed to another contraction in the all-important services and manufacturing sectors for December on Monday, raising the probability of a write-off final quarter for the economy. The surveys have pointed to a crunch in the economy for months now. 

The UK composite PMI came in at 48.5 for December, down from 49.3 in November after both the services and manufacturing indices missed market expectations. The manufacturing PMI came in at 47.4, down from 48.9 and when markets were looking for a reading of 49.1. The services PMI came in at 49, down from 49.3 and when markets were looking for a reading of 49.6.

Output fell in both the manufacturing and services sectors, with activity said to have slowed in light of last week's general election and an uncertain global economic environment. However, manufacturing bore the brunt of the deterioration, with production falling at its fastest pace for more than seven years while new work orders and employment levels both also declined. 

"The decline in the composite PMI to a 41-month low in December shows that businesses were on tenterhooks ahead of the election, with uncertainty about its outcome and Brexit dampening activity. On past form, the composite PMI is consistent with a 0.2% quarter-on-quarter decline in GDP in Q4. The PMIs, however, have tended to overplay the impact of political uncertainty on GDP growth," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics

PIM surveys measure changes in industry activity by asking respondents to rate conditions for new orders, production, hiring intentions, prices and inventories. A number above 50.0 indicates industry expansion while a number below 50 is suggestive of contraction. The survey results often correlate with official measures of output, although they can often be wide of the mark too.

Tombs says the surveys have proven a poor predictor of UK GDP  during times of elevated political uncertainty, with the rate of growth implied by the survey readings coming in some 0.2% below the actual pace of expansion on average over the last year. He forecasts the economy will grow by 0.1% in the final quarter before growth picks up to 0.4% in the opening quarter of 2020.

The UK economy stalled in October after having grown by only 0.3% in the third quarter. The economy contracted 0.1% in the second quarter but grew 0.6% in the first three months of the year. The economy was up 0.8% for 2019 at the beginning of the final quarter although economists had been forecasting growth of 1.3% for the year overall ever since January, although many are now likely to have downgraded their expectations.  

“A Brexit deal and a potential fiscal loosening could give the PMIs a boost early in the new year. But if there isn’t a pick up in the surveys early next year then the MPC may decide to help out by cutting interest rates,” says Thomas Pugh at Capital Economics.

Monday's data comes hard on the heels of a landslide win for the Conservative Party in the December general election that's given Prime Minister Boris Johnson an 80 seat parliamentary majority which all but guarantees his withdrawal agreement will sail through the House of Commons. Ratifying that agreement will radically reduce the odds of a 'no deal' Brexit and enable the UK and its currency to move onto the next phase of negotiations.

A Downing Street spokesperson said Monday the Withdrawal Agreement Bill, which is the vehicle through which the agreement itself will be ratified, will be put before parliament again as soon as Friday as Prime Minister Johnson seeks to make progress on it before Christmas.

Many economists and pundits have speculated that passing the agreement will lead to a rebound in business investment and broader economic growth, which have fallen since the referendum, although Capital Economics' Pugh has warned that without a pick up the BoE might feel compelled to cut interest rates. Most developed world central banks have either cut their interest rates this year or tipped markets that they could do so in the months ahead.

Two of the BoE’s nine strong Monetary Policy Committee voted to cut Bank Rate from its current 0.75% level in November. Changes in rates are normally only made in response to movements in inflation, with rate hikes used to reign in rising inflation and rate cuts used to stoke increases in price pressures. 

For its part the BoE has doggedly forecast that UK inflation will remain around the 2% target level over the coming years and has warned repeatedly that it might need to raise rates at some time in the year or so ahead in order to prevent price pressures from building. However, few in the market see the bank raising rates any time soon and certainly not before Prime Minister Boris Johnson concludes the second phase of the Brexit negotiations which are expected to take until at least the end of 2020.

“We look for quarter-on-quarter GDP growth to pick up to 0.4% in Q1, from 0.1% in Q4, as firms start to undertake some of the expenditure that they have put off due to the risk of a radical Labour government and a no-deal Brexit at the end of January,” says Pantheon’s Tombs. 

 

Banner

Time to move your money? The Global Reach Best Exchange Rate Guarantee offers you competitive rates and maximises your currency transfer. Global Reach can offer great rates, tailored transfers, and market insight to help you choose the best times for you to trade. Speaking to a currency specialist helps you to capitalise on positive market shifts and make the most of your money. Find out more here.

* Advertisement