Are the PMIs a smoking gun for the BoE’s hawks?

November 4, 2015

Might the latest survey of British services companies be the clincher for Bank of England policymakers who’ve been tempted to vote for higher interest rates?

Probably not. There may be good reasons why Martin Weale or Kristin Forbes would join Ian McCafferty in backing higher interest rates this month, but today’s batch of Markit/CIPS PMIs shouldn’t be one.

Taken in isolation, the figures signal good news for Britain’s economy.

Survey compiler Markit reckons the PMIs correspond with economic growth picking up to 0.6 percent at the start of the fourth quarter, up slightly from the 0.5 percent estimate for the July-Sept period. Manufacturing and construction also enjoyed a strong October.

But it is just a single month’s data. Aside from a stellar set of retail sales numbers for September, other British economic data have looked indifferent of late.

The trend of the services PMI has been downwards in recent months, and we won’t really know until next month – or even the month after that – if Wednesday’s upbeat survey was merely noise in a broader slowdown, or signifies a renewed period of faster growth.

 services pmi

For example, looking back to mid-2008, the UK services PMI actually rose two months on the trot in July and August, shortly before British economic output fell off a cliff.

To be clear, Reuters stories at the time show most economists were wary about the temporary improvement, as the PMIs still pointed to a modest contraction. Still, one economist described a sizeable uptick in August as “broadly encouraging” and another thought it would favour BoE hawks who did not want to cut rates.

The point isn’t that Britain’s economy might be facing a similar situation to mid-2008. There are no signs the recovery is at risk of petering out soon, let alone a recession.

But it’s not unheard of for journalists or market economists to take a reductive view of a single month’s data, especially ahead of a major policy meeting — such as the one on Thursday, when the BoE sets out its latest take on the economy.

“Although today’s services print is a positive surprise, it appears to be temporary. While firms feel that strong marketing drives helped with increasing current business, as well as new business, anecdotal evidence from the Markit press release points toward much of it arising from the Rugby World Cup, and hence is unlikely to continue into the end of the year.

“Today’s print also supports our view of upcoming volatility in light of the upside September retail sales surprise , suggesting potential upside risk to Q4 15 with downside risk to Q1 16. Nonetheless, today’s release does not affect our view of continued moderation within services, nor does it change our view on the BoE’s policy decision; we continue to expect a lift-off by Q2 16, after the Fed’s lift-off, which we expect in March 2016.” – Barclays economist Fabrice Montagne

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