The Boris bounce gains more momentum: The jump in the PMIs for January provides yet more evidence that UK economic activity has started to turn up sharply since the big election victory for Boris Johnson and the Conservative Party on 12 December – Chart 1. Brexit progress, the promise of a big fiscal stimulus in Spring and the end of the risk that far-left Labour leader Jeremy Corbyn could one day become Prime Minister have lifted confidence and lowered uncertainty. Improvements on the international side, including continued gains in equity markets that reflect improved confidence and investor appetite for risk, and the positive news on US-China trade add to the encouraging business environment. The composite PMI index for January jumped from 49.3 to 52.4 – the highest since February 2019. The manufacturing PMI increased from 47.5 to 49.8. The services PMI jumped to 52.9 from 50.0. The relatively bigger improvement in domestic-oriented services versus export-oriented manufacturing suggests that positive domestic developments have benefitted economic activity more than global improvements.
Broad-based rise in confidence: The PMI data have not been the best tracker of underlying GDP trends in recent years. As a result, we place less weight on them than before. On their own, we would not take too much optimism from the PMI bounce in January. However, the better data chime with similar gains in other key surveys. The totality of the evidence since the election points to a general improvement in UK economic conditions. In the Deloitte Q4 2019 CFO survey (taken after the election), a record surge lifted confidence to the highest in the survey’s history. The CBI quarterly industrial trends survey showed the highest level of optimism since the second quarter of 2014. The survey data point to a sharp rebound in economic activity in Q1 (Chart 2) which would suit our above-consensus calls for UK real GDP growth of 1.7% in 2020 and 2.1% in 2021. (Bloomberg consensus taken 24/01/20 at 1.1% for 2020 and 1.5% for 2021).
Market is paring back bets for a rate cut: Market participants had pushed up their bets for a rate cut at the upcoming MPC meeting on 30 January to 70% last Friday. Amid the weak November GDP and production data, and soft retail sales for December, several policy makers at the BoE signalled that they could vote to cut rates soon. Reacting to the signs of improvement since the election markets now put the chance of a cut at c48%. We see a much lower chance a 40%. In addition to the strong post-election survey data, the UK added 208k jobs in the three months to November – the highest gain since January 2019 - while sales expectations in the RICS residential survey for December jumped by the most in over three years. Despite the likelihood that GDP contracted overall in Q4 (est. -0.1% qoq), we think there is enough good news in the recent batch of data to keep the BoE on hold before eventually turning hawkish in H2 2020 as the economic upswing gathers pace.
For a detailed overview on our key UK calls see ‘UK outlook 2020: the critical issues’.
Kallum Pickering
Senior Economist
Phone +44 203 465 2672
Mobile +44 791 710 6575
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