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Week in Perspective: UK economy virtually stagnates in first quarter amid Brexit uncertainty

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A series of surveys measuring the UK economy were published this week. All made gloomy reading, even as one suggested the manufacturing sector was booming. The IHS Markit Purchasing Managers’ Index, published on Monday, showed a sizeable uptick in manufacturing activity in March, but the burst of productivity was largely the result of stockpiling amid fears of a no-deal Brexit. A no-deal Brexit would make it more difficult to source goods or them to consumers or partners in their supply chains. The index rose to 55.1 in March, from 52.1 in February. Any reading above 50 indicates expansion, and this was the highest level for 13 months. IHS Markit also runs a “stockpiling” sub-index for the UK that showed that stockpiling of finished goods at British firms in March hit its highest level since records began 27 years ago.

However, analysts have said that the positive impact of such stockpiling to UK GDP will be minimal, and that given the temporary nature of emergency stockpiling, and the current slump in manufacturing activity in major UK trading partners such as Germany, France and Italy, there is every chance the UK manufacturing sector will go into reverse in the coming months. On Tuesday, the IHS Markit survey of the UK services sector, which accounts for around 80% of GDP, showed that services activity contracted in March. The index dropped from 51.3 in February to 48.9 in March, with respondents blaming Brexit uncertainties. The survey suggests order books are contracting at the quickest pace since the financial crisis. Finally, the PMI survey for the construction sector showed that activity fell in March, with a reading of 49.7 – below the crucial level of 50, fuelling concerns that the sector is going through a sustained “soft patch.” The sector also contracted in February. Chris Williamson, IHS Markit’s chief business economist, said: “Both the services and construction sectors are now in decline and manufacturing is only expanding because of emergency stockpiling ahead of Brexit. The underlying picture of demand is even worse than the headline numbers suggest. Service sector order books have contracted at the steepest rate since the height of the global financial crisis in 2009 so far this year.” The composite PMI survey, which combines the services, manufacturing and construction sectors, dropped to an average of 50.6 in the first three months of this year. This is the lowest level since 2012 and suggests the economy has all but stagnated.

Meanwhile, global stock markets reacted positively on Monday to data showing Chinese economic activity rebounded in March. The Caixin Manufacturing PMI beat expectations with a reading of 50.8, above the forecasts of 50.1. Mainland Chinese shares jumped on the day, with the Shanghai Composite up 2.58% to 3,170.3. The results chimed with a survey on China’s services sector released on Wednesday, which showed activity accelerating to a 14-month high, as domestic and foreign demand improved. The result was seen as evidence that the government’s stimulus policies were beginning to take effect. The Caixin/Markit Services Purchasing Managers’ Index (PMI) rose to 54.4, the best reading since January 2018 and a big improvement on February’s 51.1. Analysts say the news is welcome even if it is too early to tell if the world’s second-largest economy has truly turned a corner.

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