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Global growth fears: UK economy "virtually stagnant" as Europe and China launch stimulus programmes

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Worries about UK and global growth increased this week caused by a flurry of disappointing data. The UK economy is heading for its worst quarter of growth since 2012 despite activity in the key services sector improving slightly last month. The IHS Markit/CIPS UK purchasing managers' index for the services sector rose to 51.3 in February from the two-and-a-half year low of 50.1 in the prior month. The IHS Markit/CIPS construction purchasing managers' index also fell to 49.5 in February from 50.6 the month before as concerns over Brexit saw projects put on hold.

Taken together, the composite PMI, which includes data from all three sector surveys (manufacturing, construction and services), rose to 51.4 in February, from 50.3 in January, at first glance suggesting a rise in economic output.

However, Chris Williamson, Chief Business Economist at IHS Markit, which produces the survey, said: “The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggests the economy is on course to grow by just 0.1% in the first quarter.” He added: “Worse may be to come when pre-Brexit preparatory activities move into reverse… business optimism about the year ahead has consequently sunk to its lowest ever recorded by the survey with the exceptions of the height of the global financial crisis and July 2016. Employment across services, manufacturing and construction is meanwhile now falling at a rate not exceeded for nine years as companies cut costs and await clarity on the outlook, highlighting the rising damage to the economy from intensifying uncertainty.”

House prices rose by almost 3% at the start of 2019 compared to the same period last year, according to Halifax. Its house price index suggested that annual house price growth was 2.8 per cent in the three months to February compared to the same time last year, way above the 0.8% growth in January. Even more surprisingly, home values rose 5.9% on a month-to-month basis, an assertion that only served to attract criticism of Halifax’s survey as an unreliable market indicator. Nationwide reported earlier this month that annual house price growth was just 0.4%.

Concerns about global growth took the headlines on Thursday and Friday as the European Central Bank reverted to “crisis-style” stimulus this week after two years of trying to wean the eurozone off the easy-money policy initiated during the financial crisis. The move was in response to worries about the region’s flagging economy. The ECB said it would offer cheap loans to banks and keep interest rates at historic lows until next year.  It also downgraded projections for the eurozone’s GDP growth to 1.1% for 2019 from 1.7% only three months ago. The news was followed almost immediately by China releasing data showing that its exports had slumped by 21% in February, news which sent shares tumbling around the world. Earlier in the week, China cut its economic growth target for this year and unveiled a range of tax cuts and infrastructure spending to boost growth. The government has set a new target of 6%-6.5%, down from the 6.5% target of last year. Meanwhile, data released this week showed that the US trade deficit hit its highest level in 10 years in December. The gap between the goods that US companies sell to China and the amount of Chinese imports entering the US jumped to a record $419billion, while the US deficit in goods with all countries hit $891billion. The news came despite Donald Trump’s efforts to reduce the deficit with his trade tariffs.

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