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Economy in Brief

U.K. PMIs Point to Subdued Growth
by Robert Brusca  January 4, 2019

The U.K. PMIs from Markit/CIPS continued to point to a relatively subdued path for growth ahead. The composite PMI is at a moderate reading of 51.4 in December, up from 50.8 in November. However, evaluated since January 2014, the 51.4 diffusion reading is in the lower 3.3 percentile of all readings generated over that period. The composite PMI is dictated relatively more by the service sector reading as is clear from the table. Both the composite and the services sector show declines over 12 months, over six months and over three months.

Manufacturing shows a different profile than services and different than the composite. The manufacturing diffusion reading is up in each of the last two months and rising on balance over three months and six months although it is lower compared to its value of 12-months ago. Manufacturing has a more comfortable 58.3 percentile queue standing, having been weaker on balance since January 2014 about 60% of the time.

The construction sector is essentially range bound since April. Its momentum is best described as sideways. However, on technical calculations of changes in the sector reading over three months, six months and 12 months, there are small positive readings in each case. Construction sports a queue standing in its 35th percentile on data back to January 2014, marking it as near the lower third of observations over that period.

The U.K. economy remains a captive of unanchored expectations and fears about what Brexit will bring. This makes the policy task of the government and the BOE much more difficult. The performance of the private sector has been impressive given the difficulty of continuing in business during such circumstances. Increasingly, there is talk of a hard Brexit in the offing, but there is also a palpable case to be made for the potential for a new referendum vote to occur with a different result. Many who focus on this prospect do so arguing that the Brexit deal now looks so bad that the ‘leave’ vote may not carry the day in a new vote. But I think the best argument for a new Brexit vote is that when Brexit was voted on in the past, no one was really sure what a vote for ‘leave’ would mean while a vote for ‘remain’ was well defined. Some in the ‘leave’ camp sold snake-oil-like promises to voters. In a new vote, both ‘leave’ and ‘remain’ would be better defined and that is a best case for people to vote on such an important decision. I am skeptical that we can know how people would vote if there were a revote since polls have not been accurate in the past.

On balance, it is clear that there is a lot of uncertainty affecting the economy and the outlook in the U.K. The potential for the path that the U.K. will take has not clarified as the Brexit decision date has approached. In view of that fact, the U.K. economy has performed surprisingly well. But it is now moving into a dimension where greater certainty will be paramount. And it is still hard to handicap what happens next, let alone what the final outcome will be.

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