Britain showing signs of growth with services sector

Seeing UK’s dominant services sector sustain its momentum from the end of 2016 in the first quarter of this year, US banking giant JP Morgan upgraded its forecast for growth. Economists at the bank revised up their prediction of GDP growth from 1.7 per cent to 1.9 per cent this year. This would represent a slight acceleration in the economy’s expansion from the 1.8 per cent growth recorded last year.

The growth reverses fears of a slowdown after the Brexit vote. Rising exports and strong demand from households have been highlighted as crucial factors driving the UK forwards and now the Organization for Economic Cooperation and Development (OECD) believes there are “tentative signs of growth gaining momentum, although uncertainty related to Brexit remain.”

The upgrade was driven by better than expected findings of economic surveys, including consensus-beating services purchasing managers’ index (PMI), and an improved outlook for Europe’s economy.

The closely watched PMI survey showed the British services sector rebounded last month as the amount of new work reported jumped. The PMI for the services sector rose to 55.0 in March, IHS Markit reported, significantly outperforming consensus expectations of a 53.3 reading.

Analysts at the OECD look at measures including business orders, corporate confidence and stock market moves to try to anticipate moves in the economy in the coming six to nine months.

Britain’s score on the composite leading indicators (CLI) index rose to 99.8 in February, the OECD said, up from 99.6 in January and the seventh consecutive monthly improvement.

The score declined through the first half of 2016 around the EU referendum but it’s improvement in the last eight months shows the improvement in the economy. The OECD’s reading is not quite back up to the long-term average of 100, but appears to be progressing close to it.

Stronger growth across much of the affluent world, as well as some of the most important emerging economies, is reinforcing that improvement.

The indicators show the 30 developed OECD economies should experience “stable growth momentum”, with France, Italy and Japan all holding steady. “Growth is expected to gain momentum in the United States, Canada and Germany,” the OECD said. At a time when the pound is weak, that should help support British exports.

Economists at the EY item club raised their 2017 growth forecasts for the UK last week on the basis that exports should rise on the combination of the weak pound and a strengthening global economy.

Analysts at Citi Bank also raised their economic growth forecast for the year, predicting GDP will rise by 1.8 per cent. Services output has grown steadily for 16 consecutive quarters, with the sector contributing more than 85 per cent of the UK’s economic growth in the last quarter, according to the Office for National Statistics.

Improved sentiment among businesses has led JP Morgan to up its prediction for business investment, while it also expected a bigger boost to trade after the fall in sterling since June. The bank joins a host of economists to revise up the GDP growth, including the Bank of England and the government’s budget watchdog, the Office for Budget Responsibility.

Economists at the bank noted a stronger world economy has boosted UK prospects, saying, “Our sense is that a stronger global impulse is playing a significant role in mitigating some of the drags coming from domestic demand at the moment.”

Exporters benefitting from an economic “sweet spot” because of the weak pound have been warned that it might not last for long.

Bank of England deputy Governor Ben Broadbent, in a recent speech said, “The result is something of a sweet spot for exporters. Sterling fell sharply after the referendum and despite the strength of consumption since then, has remained close to record lows.

“But the UK’s trading rules are for the time being unchanged. The result is that the cost and ease of exporting are unchanged but the returns to it significantly higher. With the world economy looking better than for some time, the circumstances for the tradable sector could hardly be more propitious.”

Broadbent added, “Either the currency market is too pessimistic, in which case sterling’s depreciation is likely to be reversed over time. Or it’s not, in which case the costs of exporting will eventually go up.”