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Hope for rebound as services activity expands

The UK economy looks set for a rebound from its first-quarter slump, after services activity expanded at its fastest rate in three months in May.

IHS Markit’s purchasing managers’ index (PMI) for services rose to 54, from 52.8 in April. PMI readings above 50 indicate expansion, and services are the dominant sector of the UK economy.  

Combined with PMI surveys for manufacturing and construction activity, the “all-sector” UK PMI rose to 54.5, its highest level this year.

IHS Markit economist Chris Williamson said the PMI surveys were consistent with UK economic output growing at a quarterly rate of between 0.3% and 0.4%. This would be a substantial improvement from the near-stagnant 0.1% growth of the first quarter, though it would still be the second-weakest quarter for the economy since autumn 2016 following the Brexit vote.

Alan Clarke, economist at Scotiabank, said the PMIs gave a “compelling signal” which would boost the case for the Bank of England to raise interest rates in August, provided inflation remained in line with forecasts, and official data confirmed the service sector’s upturn.

Meanwhile, retail sales recovered in May, with the highest growth figures in four years, according to the British Retail Consortium. Two bank holidays, the start of summer and preparations for a royal wedding encouraged Britons to spend in May, boosting the high street, garden centres and entertainment venues.

Like-for-like sales in May were 2.8% higher year on year, compared with a 4.2% decline in April, the BRC said. Total spending rose by 4.1% compared to a year earlier.

But while the better weather helped make up lost ground from earlier this year, the BRC cautioned that one good month did not signal a happier time to come for retailers.

“Despite this more positive set of sales results, the retail environment remains extremely challenging, with trend growth still very low by historical standards,” said chief executive Helen Dickinson.

The strain on the high street was underscored by announcements that House of Fraser was closing 31 stores with the possible loss of 6,000 jobs, and the Poundworld chain was going into administration.

House prices picked up in May, according to the Halifax. The mortgage lender’s house price index showed average prices 1.5% higher in May than in April, when prices fell by 3.1%. However, prices were only 1.9% higher than a year ago, compared to annual growth of 2.2% reported in April.

Howard Archer, chief adviser to the EY Item Club, said: “The housing market is struggling to gain traction amid challenging conditions and we suspect that any meaningful upturn will remain elusive over the coming months,” he said.

Elsewhere, eurozone economic activity hit a low in May, with economists warning of a further slowdown ahead.

IHS Markit’s composite PMI for the eurozone dropped to 51.4 in May from 55.1 in April. IHS Markit’s Williamson said: “With economic indicators turning down at the same time as political uncertainty has spiked higher, the eurozone’s outlook has darkened dramatically since the sunny forecast seen at the start of the year.”


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Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

 

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