As much as I distrust and dislike certain statistics, (no prizes for guessing which one in particular!), I like and pay a lot of attention to PMI numbers. The Bank economists held this data from different countries in high regard as a leading indicator of global growth – which in turn was important to get a handle on because of its importance to the UK export sector.
On the face of it, the numbers look a little disappointing in as much as manufacturing and services come in slightly shy of estimates and of last month`s figures. Bearing in mind the warnings that we gave about future comparisons with the almost freaky pace of growth at the end of last year, it should not come as any great surprise to see some of these numbers tail off a bit. Overall, given the super high standard set late last year, and the disastrous weather conditions in January, I regard these numbers as excellent, and fully supportive of future growth expectations and the wellbeing of UK plc.
Regular readers will know of my concerns relating to UK growth numbers in the latter part of this year. They lie mainly in doubts that consumer spending will be as reliable an engine of growth as it has proven so far in the UK`s recovery. For sustainable growth, and a sustainable recovery, it really is vital that confidence and long term investment by businesses become real and tangible. It is encouraging to see from yesterday`s numbers that new export orders were at their highest since 2011 – not may I add, that this is necessarily a pre-cursor to a reduced trade deficit, but they are another essential component in restoring confidence in manufacturing and business generally that export conditions are improving. There are other encouraging features if you look deeply enough, but essentially it is going to be time, stable conditions at home and an improving external growth picture (particularly in the eurozone!) that will determine the progress of the UK for the remainder of this year.
As far as the Bank is concerned, these are just the latest in a generally encouraging picture for the economy. Are they enough on their own to change policy relating to interest rates? Of course not. The composite numbers point at this stage to an above core growth rate this year, but future evidence of the sustainability of this recovery will be needed before rates go up. Fears in the Bank are greatest concerning exactly this; the worry is that pressure elsewhere in the wider economy may demand a rise in rates before confidence and investment are firmly entrenched. The components to watch here are inflation and unemployment. The Bank are of a mindset that until these `green shoots` in longer term investment prospects start to really take root, then a rate rise will be delivered only with much gnashing of teeth and plenty of kicking and screaming. An early rate rise in Q3 would almost certainly be outside of the Banks comfort zone, damaging to the economy and to sterling, I still think the answer is lower for longer – I do recognise the dangers, but these are delicate times. The world economy needs time for confidence to return, and the UK`s fate is inexorably tied up in this.