Mixed Christmas Cheer following GE19, sending UK markets up, up, up but more gloom for economic activity going down, down, down

Following the Conservative government’s election win last week, the markets and business have been reacting and it really is a tale of two halves.

Factory output has shrunk at its fastest rate since 2012, and here are some other results from various surveys we have found this morning:

  • Flash UK Composite Output Index: 48.5, 41-month low (Nov final: 49.3)
  • Flash UK Services Business Activity Index Dec: 49.0, 9-month low (Nov final: 49.3)
  • Flash UK Manufacturing Output Index Dec: 45.8, 89-month low (Nov final: 49.1)
  • Flash UK Manufacturing PMI: Dec: 47.4, 4-month low (Nov final: 48.9)

Company bosses blamed “domestic political uncertainty, a lack of clarity in relation to Brexit and subdued global economic conditions” (so at least two of those problems are now resolved!).

Data firm Markit’s “Flash UK Composite Output Index”, which tracks activity across the sector, has dropped to just 48.5 for December.

That’s the worst reading in over three and a half years, down from November’s 49.3. Any reading below 50 shows a contraction, so this suggests the UK economy is shrinking this month – and possibly over the last quarter.

Chris Williamson, chief business economist at IHS Markit, fears that the UK economy may contract in the final three months of 2019, given today’s weak PMI report.

That would put Britain back on the brink of recession – having also contracted in April-June, but grown in July-September. Williamson explains:

“December’s PMI survey data sadly lacked festive cheer, indicating that the economy contracted for the third time in the past four months. The latest decline was the second-largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election.”

“New orders fell for a fifth straight month, causing jobs to be cut for a fourth successive month as firms scaled back operating capacity in line with weakened demand.”

“The principal drag on order books was falling export sales, with overseas demand for UK-produced goods and services slumping in the past two months to an extent not seen since at least 2014.”

“Manufacturing production is falling at a rate exceeded only once since the height of the global financial crisis in early- 2009, but output of the vast service sector has now also fallen in each of the past two months, representing the first back-to-back declines since 2009.”

Markit’s PMI surveys are based on interviews with managers at companies across the world economy.

This makes them more timely than official GDP data, and a handy gauge to sentiment in the economy. However, they don’t always match up with the growth statistics, and can be more negative if bosses are most anxious.

Howard Archer of EY Item Club suspects that the UK’s PMI readings may improve, now the election is over.

If the PMI doesn’t improve, it could lead to the Bank of England cutting interest rates in the New Year, from 0.75%.

In another blow, Britain’s fiscal watchdog has revised up its forecasts for government borrowing.

The deficit will be roughly £20bn higher per annum over the next five years, the Office for Budget Responsibility has calculated.

This is largely due to “a new accounting treatment for student loans and a material correction to corporation tax receipts,” and is meant to give a better picture of the UK public finances.

To end on a cheery note, Rupert Harrison of BlackRock (a former top Treasury official) predicts better times ahead for the UK economy and said: ‘’FTSE 100 is on a tear today. Global investors have been underweight the UK since 2016, now reallocating back given hugely reduced uncertainty.”

“I suspect the same reduction in uncertainty will unleash some corporate investment and boost the real economy, despite poor PMIs today’’

So not all bad news, and we await to see official GDP figures in early 2020.