LONDON, May 1: Surveys showing a strong recovery in Britain’s industry and roaring retail sales on Wednesday suggested the economy would bounce back strongly in the second quarter after almost stagnating in the previous six months.
The surveys will give the Bank of England’s Monetary Policy Committee pause for thought when it meets next week. But with inflationary pressures still tame and recent economic growth surprisingly weak, economists do not expect it to start raising interest rates just yet.
A report, compiled by the Chartered Institute of Purchasing and Supply and sponsored by Reuters, showed the Purchasing Managers’ Index rose to 53.4 in April from 50.6 in March, its highest reading since December 1999.
“The survey is clear evidence that manufacturing is well over the worst,” said Jeremy Hawkins, at Bank of America.
Another survey, by the Confederation of British Industry, showed retailers enjoyed their best sales growth for nearly 14 years in April, lifted by a bumper Easter and good weather.
The CBI found 70 per cent of firms said sales were up while 13 per cent said they were down. That gave a positive balance of 57 per cent, the best performance since August 1988.
Following on from another survey on Tuesday showing the strongest house price growth on record, the outlook for the UK economy looks strong, economists said.
“The drop in unemployment, and the marked gains in all business surveys, give a consistent message of recovery,” said Michael Saunders at Schroder Salomon Smith Barney.
John Butler at HSBC agreed: “If we didn’t already know it, the consumer is showing few signs of ‘slowing of its own accord’ as the MPC asserted. Despite the MPC comments to the contrary, the consumer has not read the script and refuses to budge.”
But with recent GDP figures showing a feeble 0.1 per cent expansion in the first quarter, after zero growth in the final quarter of 2001, the MPC is not expected to rush into putting up interest rates from their current 38-year low of 4 per cent.
“With the weak GDP data, perhaps they (the MPC) will hold off for a month or two, but the evidence of recovery is so clear cut in this and other surveys that we doubt rates will stay at 4 per cent for much longer,” Saunders said.
The strong surveys bolstered the pound, which moved close to a day’s high against the dollar at $1.4572. Government bond prices slipped slightly due to the perception that interest rates might be rising soon.
The industrial recovery was echoed across Europe. Denmark’s manufacturing PMI surged to 58.4, the highest since June last year, the Irish PMI hit a 13-month high of 51.4, the Dutch PMI rose to 50.5, signalling the first expansion for 13 months, while the Greek PMI rose to 54.3, the 35th rise in three years.
Other European PMIs are due for release on Thursday.
April marked the third month in a row that the UK PMI activity index surpassed the 50 mark, which signals expansion, and was also much stronger than the 51.3 forecast by economists.
The latest improvement was driven by strong output and order books, with firms reporting an increased volume of new business both at home and overseas.
The output index soared to a two-and-a-half year high of 57.5 in April from 53.7 in March, and new orders put in their best performance since December 1999, expanding for the third month in a row to 58.6 from 52.9 with the recovering US economy shoring up demand.
There was also good news in the new export orders index which rose at its fastest rate since November 1996, to 55.1 from 50.0 in March.
“Many firms suggested that the recovery of the US manufacturing economy had acted as a catalyst to growth throughout much of Europe, and demand from the Middle and Far East was also reported to have grown in April,” CIPS said.
An example of better fortunes for manufacturers was provided by fibre optic component maker Bookham Technology Plc, which on Wednesday announced it had more than doubled its first quarter revenues and expected sales growth to continue.
In the retail sector, budget fashion outlet chain Matalan Plc reported 30 per cent annual profit growth on Wednesday and said sales growth remained strong.
“All this points to a strong Q2, and along with the indications that the consumer has held up as government spending is coming through, points to the possibility of a quarterly rise in GDP of around 0.8pc,” said HSBC’s Butler.
That would be comforting news for the government, whose forecasts of economic growth of 2 to 2.5 per cent this year have been labelled unrealistic by many economists and think tanks, calling into question its ability to finance a massive hike in spending on health care.—Reuters