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UK CommentPMI surveys signal slower GDP growth in Q1

  1. Services sentiment much weaker than expected, albeit partly weather-related
  2. New orders, activity and employment weaker
  3. We anticipate that the BoE's expectations are mostly unchanged; we continue to expect a rate hike in May
Services sentiment much weaker than expected, albeit partly weather-related
The UK Services PMI fell to 51.7 in March from 54.5 in February. This was a much weaker outcome than the consensus expectation of 54.0. The PMI Composite was also lower than expected in March at 52.5, down from 54.5 in February. The consensus expectation was 54.0. The services sentiment was burdened in March by weaker growth in order intake, as well as by business activity and employment. The latest expansion in business activity in the services sector was the weakest for over one-and-a-half years according to the survey. Survey respondents noted that unusually bad weather had been a key factor holding back business activity growth in March. However, in addition to bad weather, survey respondents cited subdued consumer demand and Brexit-related uncertainty. Employment numbers increased at only a moderate pace in March, with the rate of job creation the slowest seen so far in 2018. According to the survey, inflationary pressures picked up again in March, but were still running well below the peaks seen late last year. As such, the downward trend in price pressure appears to be intact. Looking ahead, service sector firms were optimistic about their prospects over the next 12 months. However, the degree of positive sentiment eased to its lowest since June 2017. Heightened economic uncertainty was cited as a key factor weighing on business confidence.
We anticipate that the BoE's expectations are mostly changed; we continue to expect a rate hike in May
Earlier this week, the Manufacturing PMI was slightly stronger than expected, although the reading was unchanged from February. The Construction PMI landed in negative territory and was considerably weaker than expected. Taken altogether, the PMI surveys signal slowing momentum in Q1; however, a fair share of the slowdown is probably weather-related. Based on past form, the PMI Composite suggests GDP growth could fall to 0.3 percent in Q1 from 0.4 percent in Q4 last year. In the minutes from the latest meeting of the Monetary Policy Committee (MPC) of the Bank of England (BoE), the members noted that Q1 GDP growth would probably be dragged down by weather-related problems, while underlying momentum appeared to have held up reasonably well from Q4. That suggests that the weak PMI numbers should not alter the MPC’s view on the underlying health of the economy, we argue. However, we would probably need to see both sentiment and actual numbers improve again from April before being able to conclude that momentum in the UK economy has not slowed. We continue to expect a 25 basis point policy rate increase from the BoE in May.



Source: Macrobond

Source: Macrobond

Source: Macrobond

Source: Macrobond Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

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