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Bank of England warns of interest rate rises

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It has been a week of largely disappointing economic news, starting on Monday when the EY Item Club downgraded its forecast for UK economic growth in 2019 from 1.5% to 1.3%. It also cut its 2020 growth forecast from 1.7% to 1.5%. The downgrade comes just weeks after the International Monetary Fund cut its UK growth forecast for 2019 from 1.5% to 1.2%.

However, on Thursday the Bank of England took a different tone. It left interest rates unchanged at 0.75%, and revised up its UK growth forecast for 2019 from 1.2% to 1.5%, making it one of the most optimistic forecasters. It cited a boost to economic growth in the first quarter from pre-Brexit stockpiling, and an improving outlook for global growth. Bank of England governor Mark Carney then raised the spectre of more interest rate rises if the predictions were correct. He said: “If something broadly like this forecast comes to pass... it will require more frequent interest rate increases than the market currently expects".

Earlier in the week, a key survey showed UK manufacturing growth slowed in April as Brexit-related stockpiling eased. The IHS Markit/CIPS purchasing managers' index fell to a two-month low of 53.1 from a 13-month high of 55.1 in March. The survey chimed with news that British car production fell by 14% in March, the 10th consecutive monthly decline. This was blamed on a general fall in demand.

More positively, the UK’s construction sector returned to growth in April, but the devil in the detail showed the sector still faced significant challenges. The IHS Markit/CIPS construction Purchasing Managers’ Index (PMI) rose to a three-month high of 50.5 in April from March’s level of 49.7. However, this expansion was due only to rapid growth in the housebuilding sector: other sub-sectors declined. “Commercial activity and civil engineering both remained on a downward path in April,” said IHS Markit’s Tim Moore, while new orders fell at their fastest rate since March last year. "The forward-looking survey indicators remain subdued,” he added.

The UK services sector returned to growth in April according to data released on Friday morning. The UK Services PMI rose to 50.4 in April, up from 48.9 in March. Chris Williamson, Chief Business Economist at IHS Markit, said: “A near-stagnant service sector in April means that all three major parts of the economy were struggling to grow in April…suggesting the economy more or less stalled in the second quarter.”

The UK is not the only economy battling economic headwinds. Data out of China this week suggested that the world’s second-largest economy was decelerating more rapidly than had been expected. A series of manufacturing and non-manufacturing PMI surveys all showed continued expansion, with readings above the crucial 50 level but on a downward trajectory, suggesting the economy is slowing. The news worried investors and sent shares lower in many countries. The Eurozone’s manufacturing sector also continued to shrink in April, with the IHS Markit manufacturing index for the eurozone at just 47.9, well below the 50 mark that would indicate expansion. “The manufacturing sector remained deep in decline at the start of the second quarter,” said Chris Williamson, chief business economist at IHS Markit.

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Main source of information: Company Report and Accounts, Bloomberg.

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