top of page

#57 - Green Shoots in the UK Economy: A Glimpse of Recovery Amidst Monetary Shifts

Today's S&P Global/CIPS UK composite purchasing manager index surprised sharply on the upside, showing a preliminary reading of 50.1 for November, the first reading above 50 since July 2023. Expectations had been set for an unchanged reading of 48.7. Green Shoots or Head Fake? Looking at our country overview for the UK economy, we noticed a deterioration in the PMIs since summer of 2023. This may not surprise much given the significant monetary tightening for an economy heavily geared towards the service sector, consumer spending and the housing market. However, the slowdown was mostly evident in manufacturing, but the more critical service sector remained relatively robust, with the service PMI ranging between 49 and 55 over the last 6 months. After a dip below 50 in the last 3 months, the service sector PMI is now above 50 again.

Interestingly, the OECD leading indicator continued to rise throughout 2023 from the bottom in Sep 2022 indicating a ongoing uptick in activity. At the same time inflation softened rapidly in recent months, while the BoE has stepped to the sidelines for now. Hence, the uptick in the PMIs is likely not be as big a surprise as it looks at the first glance as businesses may feel a relief from lower inflation and the peak in rates.

Why hasn't the consumer been more restrained? First, the BoE monetary tightening may only end up having an effect on consumer spending with quite a lag, as interest rate sensitivity in the UK is perhaps not as high as generally feared. As the chart from BCA research shows, the share of adjustable rate mortgages in the UK is relatively subdued below 20%. Although much higher than in the US, the UK consumer is not as highly rate sensitive as for instance the Scandinavians. Since 2021, the average mortgage rate across the rich world has only risen by half as much as the average central-bank policy rate.

Second, the labor market has so far remained robust. Ground reports indicate a trend, possibly applicable to other economies, where companies are hesitant to lay off staff due to concerns over higher costs associated with rehiring personnel later if needed. A lesson learnt from the pandemic aftermaths?

Third, financial markets have so far behaved and the FTSE 100 still trades in the vicinity of the all time highs as do many other global equity indices. Wealth has not been significantly impacted by the rate increases so far. Indeed, savers are currently benefiting from higher interest rates on their deposits.

Considering that consumers have not been significantly impacted by the rate hikes thus far, what implications might this have for the UK economy as we approach 2024?

From our qualitative perspective we are lukewarm to the idea of a significant rebound in economic activity as local sentiment remains dire. To adopt a more positive economic outlook, we need to see sustained improvements in consumer demand and sentiment. The full impact of higher refinancing costs, which could potentially weaken consumer sentiment and spending, remains to be seen.

Conversely, our quantitative regime model currently suggests an improving trajectory for the UK economy. Moreover, predictions from our machine learning model (KNN) draw parallels with the post-2008/09 financial crisis period of 2013/14 (as illustrated by the red line), suggesting further economic recovery.

What if the model is correct versus the current rather bleak consensus narrative? Considering the potential accuracy of our quantitative model in contrast to the prevailing bleak economic outlook, the future might not hold a 'hard landing' – a significant economic downturn – as many fear. Instead, if we follow this data-driven perspective, we could see continued economic recovery, especially as the effects of recent inflation shocks are absorbed and interest rates stabilize.

For asset markets, the FTSE 100 traded mostly sideways in 2014 after a robust 2013 as the Bank of England was on hold. The british pound tended to trade slightly stronger versus the USD and EUR while long end gilts performed. In sum, if this scenario turns out to be true, 2024 may become just a "boring" year for asset markets.

Bottom Line: Are you ready for the non-consensus view?

The UK economy's unexpected resilience, as evidenced by the recent uptick in purchasing manager indices and OECD leading indicators, challenges the prevalent narrative of high rate sensitivity. Supported by a strong labor market and steady equity prices, the consumer sector is still to react to the higher rates. Interestingly, our quantitative model forecasts a positive trajectory reminiscent of the post-2008 financial crisis recovery seen in 2013/14.

Is it prudent to consider a more balanced view of the UK economy's outlook, avoiding an overly pessimistic stance? Feedback very welcomed. Team MacrometR

No financial advice.


bottom of page