It is very early days, but the UK economy appears to be enjoying a bounce at the start of 2020. Even as Britain prepares to formally leave the EU today, signs that the economy is strengthening helped persuade the Bank of England to keep interest rates unchanged at 0.75% on Thursday.
The Composite Purchasing Managers’ Index (PMI) – a monthly gauge of economic activity produced by IHS/Markit – showed an improvement for the first time in five months. Firms also reported the biggest increase in new work since September 2018. The reading from the composite PMI, which combines the services and manufacturing sectors, rose to 52.4 in January, up from 49.3 in December. Any reading above 50 indicates activity is growing while below 50 means it is contracting. It is the highest reading for almost 18 months. The manufacturing sector produced a reading of 49.8 in January, up from 47.5 in December and only fractionally in contraction territory, suggesting its long decline could be bottoming out. The PMI for the key UK Services sector rose to 52.9 in January, a big jump from the flat reading of 50.0 in December. The report said business optimism also hit its highest level since March 2015, as companies looked forward to rising demand at home and abroad thanks to a perceived improvement in the global economic outlook.
The news chimes with a report released on Thursday that showed UK economic confidence rose to a five-month high in January, led by an improvement in businesses in the services sector, thanks to the December election result removing much of the uncertainty surrounding the economic outlook. The European Commission's monthly survey of business and consumer confidence showed the UK's score rising to 91.5 from 88.2 in December.
House prices also appear to have started the new year strongly. The latest Nationwide House Price Index said prices rose at an annualised rate of 1.9% in January, exceeding the 1.4% figure in December and the highest level of growth in 14 months. “Healthy labour market conditions and low borrowing costs appear to be offsetting the drag from the uncertain economic outlook,” said Robert Gardner, Nationwide’s chief economist. January’s pickup comes after a whole year of annual house price gains below 1%. Further encouraging news for the housing market came from trade body UK Finance, which revealed this week that mortgage approvals hit a four-year high in December.
Approvals for house purchases by the main high street lenders rose to 46,815 in December from 44,058 in November, the highest level since August 2015. The news follows several months of falling approvals as uncertainties around Brexit and the general election took their toll. One area that hasn’t bounced back in January is retail, according to data from the Confederation of British Industry (CBI). Its distributive trades survey showed retail sales flat for the third consecutive month, with little sign of an improvement in February. The CBI said sales were “poor for the time of year”. Anna Leach, deputy chief economist at the CBI, said: “Both official data and business surveys are painting a picture of subdued activity for retailers. A challenging Christmas has extended into the new year, with little expectation of any improvement soon.” In the US, the Federal Reserve also kept its interest rates on hold this week as it hinted it expects inflation to rise more strongly than previously forecast.
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