UK April Services PMI out of contraction

Macro 4 minutes to read

Christopher Dembik

Head of Macro Analysis

Summary:  At face value, the latest UK services PMI print suggests a new level of confidence in British industry. But don't be fooled – Brexit anxiety still weighs heavily on the economy and credit growth is shockingly bad for a developed country.


The UK April Services Purchasing Msnagers' Index is out – it reached 50.4 vs 50.5 forecast and prior 48.9. As widely expected by investors, it is getting out of contraction, but the trend remains negative in the long run. We can explain this increase by the fact that the original Brexit deadline of March 29 was postponed and by positive momentum in the labour market (notably higher wages). Overall, as pointed out by IHS Markit, the rate of expansion was much softer than on average in 2018 and a large number of respondents continued to highlight Brexit uncertainty as the main risk for the UK economic outlook. This should prompt customers to postpone spending  in coming months, an attitude could be accentuated by low household saving ratio compared to the historical standard of 4.8%.

The big picture

Our view for the British economy has not changed much over the past few months. Brexit uncertainty remains a key issue, but the number one issue is the lack of new credit growth. Our in-house credit impulse for the UK, which leads the real economy by nine to 12 months, is running at -2.2% of GDP, one of the weakest levels seen in developed countries.

All the other leading indicators also point to downside risks as Brexit anxiety is still hurting confidence and business. The UK OECD leading indicator, which is designed to anticipate turning points in the economy six to nine months ahead, fell in February for the 19th straight month. The year-on-year rate started 2018 at minus 0.6%; it now stands at -1.52%, which is quite a swing over such a period of time.

In addition, new car registrations, which are viewed as a leading indicator of the wider economy in the UK, have been tracking downwards since 2016, driven by falling consumer confidence. The drop since the pre-Brexit referendum is stunning – about 12%! The UK economy may still be able to run above potential for a few more quarters, mostly due to stockpiling for Brexit but, as one of its key drivers, new credit, is vanishing, it will ultimately lead to less growth and increased risk. 
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.