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UK economy returns to growth in January

By Michele Maatouk

Date: Friday 24 Jan 2020

(Sharecast News) - The UK economy returned to growth in January, according to data released on Friday, but analysts were divided over whether this would be enough to keep the Bank of England from cutting interest rates next week.
The IHS Markit/CIPS flash composite purchasing managers' index - which measures activity in both the manufacturing and services sectors - rose to 52.4 in January from 49.3 in December, coming in above consensus expectations for a reading of 50.7.

The services PMI increased to 52.9 from 50.0, versus expectations of 51.1. The manufacturing PMI, meanwhile, printed at 49.8 this month from 47.5 in December, surpassing expectations of 48.8.

Business activity expanded for the first time in five months, driven by the sharpest increase in new work since September 2018.

Chris Williamson, chief business economist at IHS Markit, said: "The survey data indicate an encouraging start to 2020 for the UK economy. Output grew at the fastest rate for sixteen months amid rising demand for both manufacturing and services, suggesting business is rebounding after declines seen late last year.

"Intensifying political and economic uncertainty ahead of the general election has started to ease, encouraging more spending and helping push business expectations of future growth to its highest since mid-2015."

He said the survey is indicative of GDP rising at a quarterly rate of about 0.2% in January, representing a "welcome revival" of growth after the malaise seen in the closing months of last year. He also noted that hiring has picked up.

"The uplift in sentiment about the outlook hints at even better growth to come, but confidence needs to continue to rise to ensure this solid start to the year has legs."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the data was strong enough for the Monetary Policy Committee to keep interest rates on hold next week.

"The big jump in the composite PMI- the fifth largest month-to-month gain since the survey started in 1998 - makes it likely, though not absolutely certain, that the MPC will pause for thought next week," he said.

"The PMI now is half-way between the 51 -level that appears to have triggered the MPC to ease in the past and the 54 level that prevailed when the Committee hiked rates in 2017/18. Admittedly, the PMI is consistent on past form with quarter-on-quarter GDP growth of 0.25% in Q1, only a bit above 2019's 0.2% average rate and slightly below the MPC's estimate of its trend rate, 0.35%. The Committee can make this point if it is determined to ease."

However, Neil Wilson, chief market analyst at Markets.com, said: "Yes the PMIs bounced back...but this was entirely to be expected and reflects businesses letting out a collective sigh of relief after the Conservative Party victory in the December election as it heralded an end to the paralysis over Brexit and killed off the prospect of a radical Jeremy Corbyn-led government.

"Businesses ought to be a damn sight more confident as a result - it does mean that we're out of the woods. Ultimately, whilst clearly diminishing the case for a cut, I don't see these PMI surveys as being enough to prevent the Bank from cutting - I think they have already decided on this."

Wilson argued that the recent harder data has been "a lot less auspicious", with GDP weak and inflation coming off sharply.

"The Bank doesn't want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed's playbook in cutting early in order to prevent a downturn. This is the key thing to remember - the Bank does not want to let a weaker economy fester," he said.

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