- On the surface, the British economy looks to be on shaky ground, but things aren’t as bad as they might seem.
- That’s the assessment of Andrew Goodwin, lead UK economist at Oxford Economics.
- Goodwin argues that the way people are analysing the data makes it look a lot worse than it really is.
LONDON – Virtually every indicator and data point released in April and early May for the UK economy was below expectations, and some were truly terrible.
Here’s a snapshot:
- Q1 GDP growth – 0.1%, compared to a forecast of 0.3%. Growth in the final quarter of 2017 was 0.4%.
- Manufacturing PMI – 53.9, a 17-month low.
- Services PMI – 52.5, a little better than in the previous month, but well below expectations.
Just a month ago, a Bank of England interest rate hike seemed a certainty at its May meeting – held next Thursday. Now, however, a hike looks impossible thanks to the poor data.
But the current data, according to Oxford Economics at least, does not augur economic doom for the UK in the near future, and that such forecasts have been “overdone” in recent days.
“Much of the subsequent media commentary has argued that these results suggest we are unlikely to see much of a rebound in GDP growth in Q2 and that the UK economy is in the midst of a sustained slowdown,” Andrew Goodwin, Oxford’s lead UK economist said on Friday.
“But we are unconvinced and see a number of reasons, both related to the data and the wider economic backdrop, which suggest that the gloom that has been increasingly enveloping the UK economy has been overdone.”
The reason, Goodwin says, the official data (released by the ONS) and the data from surveys like CIPS’ and Markit’s PMIs (which are forward looking) doesn’t match up, making the creation of an accurate picture tricky.
“On a sectoral basis, the official output series and CIPS results were poorly matched in Q1, so merely splicing the Q2 survey data onto Q1’s official series does not offer an accurate steer,” he wrote.
“In particular, both the manufacturing and construction sectors reported much stronger survey results than was reflected in the official data. In Q1, the manufacturing PMI was consistent with quarterly output growth of 0.7-1.0%, in contrast to the official estimate of just 0.2%.”
Moreover, Goodwin argues, the CIPS surveys could actually be underplaying the strength of the UK economy, given that there is no PMI for the retail sector – an area where growth is expected to be solid in the coming months.
“It is also possible that the CIPS services survey downplays the extent to which the sector’s output will rebound in April, given that it excludes the retail sector,” he wrote.
“The ONS assumed a 0.8% month-on-month drop in distribution output in March, consistent with the snow-related drag on retail sales, so as with construction output, this sector is due a sizeable revival in April.”
The picture also looks to be improving for consumers, Goodwin noted.
“More generally the backdrop to consumer spending is clearly improving, with lower inflation and firmer wage growth bringing an end to the real income squeeze, an unambiguously positive development given the degree to which the UK economy relies on consumer spending to drive GDP growth.”
Don’t expect a huge economic boom in the UK this year, but at the same time, it’s probably worth taking predictions of doom and gloom with a pinch of salt.
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