Bill Jamieson: Daring to hope the worst is past

AT LAST, a chink in the gloom – or more accurately three arriving all at once. Could the economy at last be on the turn?

Bill Jamieson

A key reason for the persistence of economic depression is a widespread public conviction that stagnation has settled in permanently and that there is no foreseeable prospect of improvement. Those seeking a measure of low household confidence need look no further than research by YouGov for the Resolution Foundation released last week for a near total disappearance of “the feel-good factor”.

It showed that only 14 per cent believe they are better off today than at the time of the last election. More than half (53 per cent) said they felt worse off. There is a widespread sense that the corner has not yet been turned. By 46 per cent to 19 per cent, people expect to be worse off rather than better off by the time of the next election. And less than half the public – 43 per cent – think living standards will return to their pre-recession levels within the next five years (or ten years after the crisis erupted in 2008). Throat-slitting time?

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But a striking feature of business and politics is how quickly moods can change – just as they do in financial markets. Who last May would have dared predict that the UK stock market would rise 23 per cent over the subsequent 12 months?

In similar vein, the arrival of better news on the economy can quite quickly change attitudes and behaviour, particularly if signs of upturn can be discerned across different sectors.

That is why the latest Purchasing Managers Index pointers are important in acting as potential catalysts for a change in business and household confidence. This in turn may have a crucial bearing on the disposition of major companies to start spending some of that aggregate £750 billion corporate cash pile.

The three surveys are important in the evidence of a pick-up in the specific sectors of manufacturing, construction and services. But, taken overall, they suggest the UK economy may be establishing a recovery base. The composite PMI for services, manufacturing and construction output climbed to an eight-month high of 52.1 in April from 51.0 in March, taking it appreciably further above the 50.0 level that indicates flat activity.

The week brought news of an improved April purchasing managers’ construction survey. While it is still unlikely the sector will show any growth in the second quarter, Global Insight’s Howard Archer says it does “at least offer hope that the sector could be past the worst. The survey suggests that at the very least the sector should be less of a drag on GDP.”

The survey showed construction output shrank only modestly in April. Housing expanded for a third month running in April and at the fastest pace for a year.

While the construction sector only accounts for 6.8 per cent of total UK GDP, its 8.1 per cent contraction across 2012 knocked 0.6 percentage points off GDP growth, holding this back to an overall gain of just 0.3 per cent. Construction output then contracted by 2.5 per cent quarter-on-quarter in the first quarter of 2013, knocking 0.2 percentage points off GDP growth.

Freezing weather in February and March may have unduly depressed the first-quarter figures, with the latest survey data for April enjoying a catch-up rebound.

Construction still faces major problems. But recent surveys point to a pick-up in housing activity while boosts to capital spending and infrastructure in the Budget and the Autumn Statement should also help.

But it was survey data on the services sector from Markit and the Chartered Institute of Purchasing and Supply (CIPS) that provided the biggest fillip. This showed the headline business activity index reached a level of 52.9 in April, up from 52.4 previously (a reading above 50.0 signals expansion). This was the fastest growth rate in activity seen since August 2012. It is particularly encouraging as services account for some three-quarters of the UK economy.

This increase in the headline index was supported by a sharp rise in levels of new work, the fastest rise since May last year. This boost to sales, the Centre for Economics and Business Research notes, is now starting to put pressure on business capacity, as backlogs of work rose for the first time since September. In response, firms have continued to increase their staffing numbers, helping to offset public sector job losses.

However, caution is still needed. Business expectations for the coming months dipped marginally in April, with businesses citing economic and competitive pressures. And input costs continued to rise.

The CEBR’s Rob Harbron says: “Overall, this week’s data help to give further indication that the UK economy is recovering in 2013, led by the service sector, following the avoidance of a triple dip in Q1 2013.”

And, says Howard Archer: “It is not just the fact that services activity was reported to have grown at the fastest rate for eight months in April that was encouraging, but also the generally improved tone of the survey. Incoming new business expanded at the fastest rate for 11 months in April while backlogs of work increased, which is supportive to further services growth in the near term at least.”

Other pointers last week also support the view that the economy is now on a recovery path. Scottish Government figures last week showed the value of retail sales in Scotland grew by 0.6 per cent in the first quarter compared with the previous quarter, while sales by volume rose by 0.3 per cent.

Meanwhile, mortgage lending across the UK continues its gradual improvement. The Bank of England reported that loan approvals for house purchases rose to 53,504 in March after relapsing to a five-month low of 51,947 – though the level is still very low compared with pre-bank crash levels.

The better news from the PMIs, together with other pointers, is likely to remove the urgency for further monetary stimulus by the Bank of England’s monetary policy committee when it meets this week. But a further QE boost is by no means off the table and may well be back centre stage after new Bank Governor Mark Carney takes over in July.

In a speech last week, he reiterated his view that central bank policy across western economies needs to lean towards recovery and not be exclusively fixated on hitting inflation targets. One positive development in this regard is a shading down of inflation expectations by some economists on the back of PMI evidence of relatively stable input costs.

So we have evidence of economic pick-up. Now we need evidence of traction and sustained improvement. Only then can we be sure we really are at last on Recovery Road.

Twitter: @Bill_Jamieson