At last, good news on the UK economy

It’s been a long time in waiting, but the UK economy seems to be seeing a strong recovery— it’s the best news on the UK economy for a long time.

Article updated: 17 February 2020 3:00pm Author: Michael Baxter

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People are strange creatures. The UK economy is apparently seeing a very strong recovery. I can only think of one explanation.

The explanation lies with the illusion of certainty. They say the markets hate uncertainty. For three years, the UK economy has wilted under the burden of Brexit related uncertainty. Now we have had an election, the promise that now the UK has freed itself from the ‘shackles’ of the EU it can at long last fulfil its potential, like it was during the wonderful 1970s. We have a Prime Minister who promises the certainty of success and then all (or most) of the economic indicators change — for the better, much better.

For what it’s worth, I don’t buy the promises — I can not for the life of me see how the UK will be better off outside of the EU, but the data says what the data says. If enough people believe the promises, maybe they become self-fulfilling.

Personally, even without Coronavirus, I think there is much uncertainty about the future of UK trade as there was before the election, but maybe perception is all. Maybe the UK economy can be talked into recovery.

Take my favourite gauge of the UK housing market, the Residential Market Survey from the Royal Institution of Chartered Surveyors (RICS). Its headline index, which takes the percentage net balance of surveyors who reported a rise in house prices relative to those who reported a fall, rose to plus 17. That was the highest reading since May 2017. The index has been either negative or zero in every month since July 2018.

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I have noticed that whenever this index passes the x axis — I mean either goes negative or positive — in any significant way, the broader economy tends to follow a few months later.

There is data bringing good news, however the purchasing managers indexes (PMIs) all point to strong recovery.

These PMIs are just about the most up to date economic indicators we have, and 50 is the key reading — below points to contraction, above points to expansion.

For much of last year, the PMIs tracking manufacturing, construction and services were either below 50 or perilously close. The composite PMI spent most of the year below 50 and suggested the UK was on the verge of recession.

A recession is defined as two successive quarters of negative growth.

In fact the UK grew by 0.6 per cent in Q1 last year, contracted by 0.1 per cent in Q2, expanded by 0.5 per cent in Q3 and saw zero growth in Q4. Year on year, growth was 1.1 per cent.

The main reasons why the UK economy performed better than the PMIs suggested is that the PMIs don’t cover retail or government spending — and last year saw a modest relaxation of austerity.

As for the latest PMIs, the manufacturing PMI rose to 50, its highest level since April and maybe more encouraging, there was a sharp fall in stocks — suggesting the next few months may even improve.

The construction PMI rose sharply to 48.4. It still points to contraction, but the slowest pace of contraction in eight-months.

The services PMI rose to 53.9, the highest reading in six months and the composite PMI (which combines all three, weighted for the importance of each sector) rose to 53.3, also the highest level in 16-months.

Not everyone was gleeful. Hansen Lu, Property Economist, at Capital Economics said of the housing market, for example: “The recent rise in activity reflects improved sentiment after December’s decisive election result. But the election did nothing to change the housing market fundamentals. House prices are already high relative to incomes, and unlike previous decades, prices won’t be supported by another sharp drop in mortgage interest rates.”

But as I say, the data says what the data says, and the data says the UK economy is set to see its strongest performance, maybe since the Brexit vote — Coronavirus permitting.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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