The Prime Minister keeps saying that the ‘plan is working’, but are there really signs of a revival in the UK economy?
- Economic data is already improving after a technical recession in the fourth quarter of 2023
- Headline inflation is likely to drop sharply over the next few months
- Wage growth and weak retail sales are reasons for caution
Rishi Sunak is betting his electoral fortunes on a turnaround in the UK economy. This is as far-fetched as it initially appears, with some early signs of an improvement. It may not come soon enough to save the current government, but it might bring about greater confidence in the UK stock market.
Economic data is already improving after a technical recession in the fourth quarter of 2023. GDP rose 0.2% in January, helping by an improvement in the services sector. Recent flash PMI data showed a strong end to the first quarter. S&P Global Market Intelligence said: “A further robust expansion of business activity ended the economy's best quarter since the second quarter of last year. The survey data are indicative of first quarter GDP rising 0.25% to thereby signal a reassuringly solid rebound from the technical recession seen in the second half of 2023.”
There are expectations that headline inflation will come down sharply over the next few months. The fall in the energy price cap from 1 April will make a difference, and recent data showed shop price inflation falling significantly. It dipped below 2% for the first time in two years in March . Rate cuts would be welcome, and Bank of England Governor Andrew Bailey has said they are now ‘in play’ for future meetings.
There is also growing business confidence. Recent PMI surveys signalled a fifth consecutive monthly expansion in business activity, and output in the services sector is also showing a sustained rise. March also brought a small but psychologically significant return to growth for manufacturing output,
That is not to say that the UK economy is off to the races. Service sector inflation has been persistent, and the Bank of England is likely to want to see wage growth falling before it acts on interest rates. Retail sales were flat in February after a strong bounce in January. The volume of goods sold remains 1.3% below pre-pandemic levels, and continues to be hit by squeezed household finances.
Nevertheless, fund managers are increasingly optimistic. Clive Beagles, manager of the JO Hambro UK Equity income fund, said: “With UK savings ratios elevated relative to pre-pandemic levels, only a modest degree of monetary easing will likely be required to boost spending and activity materially. Just as important will be the impact this has on international and domestic investors’ views of the UK economy and, by association, the UK stock market. With UK inflation no longer an outlier in an international context and an economy that has the capacity to rebound reasonably sharply, the very low valuations on offer in the UK market will begin to attract fresh interest.” Rishi Sunak will be hoping he is right.
