UK: Lacklustre PMI indicates weakness - ING

James Smith, Developed Markets Economist at ING, suggests that as the Bank of England tries to gauge how much of the recent dip in UK’s economic activity was temporary, the message from the latest services PMI is that the snow wasn’t entirely to blame and at 52.8, the index is now at its second-lowest level in around 18 months (superseded only by last month’s weather distorted figure).

Key Quotes

“The accompanying press release makes it clear that much of this has to do with weak consumer demand – and we don’t expect these difficulties to fade rapidly. Whilst disposable incomes are no longer falling, higher food and fuel costs are still largely offsetting rising pay packets. And with consumer credit growth having fallen sharply in March, there are few obvious ways that shoppers can finance higher spending in the near-term. Combined with rising minimum wage costs and higher business rates, retail margins are likely to remain under pressure.”

“But the big question for markets is whether the recent run of weak data is enough to write-off an August rate hike.”

“We therefore still think policymakers have a preference for tighter policy, and they will be acutely aware that it could get more complicated to raise rates later in the year as Brexit talks heat-up.”