IHS Markit /CIPS UK Composite PMI Grows Strongly In January 2020 Fuelled By A Resurgent Services Sector

The monthly Purchasing Managers Index data published by IHS Markit /CIPS for the British economy for the month of January 2020 has revealed that the country has registered a strong rebound in the first month of the year and extended upon the gains made during the second half of December 2019. The index, which is based on the responses of nearly 400 purchasing managers in the country regarding new order intake and procurement decisions taken by them, is seen as a leading indicator of how business activity might shape up in the country in short to medium-term period. Prior to this composite index data release for the British economy by IHS Markit /CIPS on 5 February 2020, the organisation had released the IHS Markit /CIPS UK Manufacturing PMI on 03 February 2020, IHS Markit /CIPS UK Construction PMI on 02 February 2020 and IHS Markit /CIPS UK services PMI on the same day as the composite index for the month of January 2020. All the indices reflect growth having taken place in the country, with the services sector performing the best.

The UK Composite Output index is the weighted average of UK Services Business Activity Index and UK Manufacturing Output Index. Index figure for the month of January 2020 stood at 53.3 signifying an expansion compared to 49.3 for the month of December 2019 when it was still in the contraction phase.

Business activity in the United Kingdom had taken a turn for the good from the time the Benn Act was upheld by the British parliament bringing in a lot of clarity on the stance the United Kingdom will be taking on the matter of exiting the European Union, with or without a deal. This was followed by the British Prime minister negotiating a draft deal with European Union officials for an ordered withdrawal, which was quickly followed by an announcement of general elections in the country. The second most powerful impetus that the British economy received was the victory of Prime Minister Boris Johnson in these elections with a solid majority, which paved the way for the draft deal negotiated by him with the European Union officials, to be formalised. Previously it has been a major point of concern when the Theresa May government failed to pass in the British Parliament more than one of such draft deals, leading to the Brexit ordeal becoming murkier and more elongated. The British economy which had been reeling under tremendous recessionary sentiments, battered by prolonged adverse macroeconomic headwinds, found the panacea it was looking for. Several rounds of incentives in the form of stimulus doled out by the British government and the Bank of England could not achieve what these two political events have achieved. The first signs of revival in the economy had started to become visible in the second half of December 2019 itself when several of the leading economic indicators rebounded from their prolonged downturns and started to trade positively. The Bank of England, supported by these resurgent growth indicators, decided against cutting interest rates further in its policy decision announced on 30 January 2020 while it was widely anticipated that the bank would cut rates one more time. The bank. in the first week of January 2020, had warned that it might have to cut interest rates further if there were no signs of an economic revival which, while not ensuring economic resurgence, could very well put the country at the risk of falling into a liquidity trap.

The rate at which the British economy is rebounding, however, could cool down in a few months. Several observers point out that this resurgence could be the result of a sudden release in pent up demand that had accumulated over the past three years when businesses and the general public had postponed many of their large scale expenditures, for the revival of the economy and the arrival of better times. The resurgence in the property market and the increase in housing prices across the country is a testament to that along with the increase in the number of mortgage deals that the banks have transacted in the month of January 2020. The index also confirms that the British economy will be growing by 0.2 per cent in the first quarter of 2020 and is a further indication that the growth is going to be sustained and not a temporary phenomenon on account of the positive news inflow from the month of December 2019. This development, more than anything, is also indicative of how the average British citizen views the event of Brexit and what it entails for the future of the British economy. The United Kingdom parted ways with the European Union on 31 January 2020 after being a member for nearly forty-seven years. The United Kingdom over a period of time, had started to become wary about its economic wellbeing, being positioned under the umbrella of the European Union. The country felt that given its rich history of being the centre of global finance and trade for centuries, taking directions from Brussels, where the head office of the European Union is located, was constraining its growth potential.

Experts at IHS Markit /CIPS while commenting on the data stated that the resurgence is primarily on account of increase in domestic business activity and that the export sector is still hesitant on account of tariff and regulatory complications emerging out of Brexit. The rush in business activities has also led to increased staffing which, in the short run will see a rise in the wage levels in the country, translating into a rise in prices of goods and services. These conditions will provide further impetus to increasing investment activity in the country which will eventually pull out the economy from under the recessionary pressures that a large part of it is still reeling under.

The experts of IHS Markit /CIPS, however, warn of major global risk factors which pose a threat to this revival. Alongside the slowdown in the Chinese and Indian economies and the trade war-like situation between the United States and China, a new global economic threat has emerged in the last fortnight, in the name of Coronavirus. The virus strain, which is a cousin of the SARS virus, has already claimed 490 lives worldwide and in China with 20,000 more infected. The virus has already put half of China under lockdown with several other countries putting restrictions on people travelling to and from China. The outbreak has already affected the world’s aviation sector severely. Business activity in China already has taken a hit along with several other countries also having been affected, which have significant trading activities with that country. The United Kingdom has significant business interests in China with tens of hundreds travelling to that country with a similar number of people coming to the United Kingdom. The actual economic impact of the viral outbreak on the British economy will be best captured in the next month's IHS MARKIT / CIPS UK COMPOSITE PMI.