Want to know if the UK economy will bounce back? Look at these numbers, says HAMISH MCRAE

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Expect the first UK interest rate cut to come in May. Why so sure? Well, let’s start with what’s going on here.

Next Thursday we will receive the quarterly economic update from the Bank of England in its Monetary Policy Report.

It was originally called the Inflation Report, but the Bank thought it had inflation under control and so renamed it in November 2019 – after which inflation came roaring back.

The new forecasts will raise the Bank’s growth outlook for this year from zero – which has always seemed too pessimistic – to around 0.5 percent, and it will lower inflation expectations from 3.1 percent to around 2.5 percent.

Rate cuts: Our inflation rate is slightly higher than the US and Eurozone, so we have to wait for them to move.  Once they do, we can follow them, says Hamish McRae

Rate cuts: Our inflation rate is slightly higher than the US and Eurozone, so we have to wait for them to move. Once they do, we can follow them, says Hamish McRae

These revisions will bring the Bank more or less in line with consensus, but the fall in inflation will be far from enough to pave the way for a rate cut.

In fact, I think the overall rate of the consumer price index, currently at 4 percent, may have increased slightly in January. We will get this figure in the middle of next month.

The sharp drop in the CPI, perhaps even less than 2 percent, is expected to occur in April. This will be the trigger for the Monetary Policy Committee (MPC), responsible for setting rates, to start cutting rates in May.

There is an external reason why we expect this timing. Other central banks will have moved.

Markets expect the US Federal Reserve to begin cutting interest rates in March, and expect the European Central Bank to do so in April.

This gives us cover. Our inflation rate is slightly higher than the US and Eurozone, so we have to wait for them to move. Once they do, we can follow them.

But what about growth?

Here the story gets really interesting. The economy was fairly stable during the second half of last year. It is possible that with the strikes there was even a recession, although experience has taught us that statisticians generally believe that their first estimates should be revised upwards, and I expect that to happen. reproduce.

But for the future, the outlook is much more positive, even surprising.

The best forward-looking indicators are what are called Purchasing Managers’ Indices, PMI. If you’re not familiar with them, it’s a clumsy name for a clever idea. If you are aware, skip the next two paragraphs.

For the future, the outlook is much more positive, almost surprising.

You ask people who make purchases for businesses a simple question about a number of variables: orders, deliveries, employment, prices, etc. The question is whether they expect things to get better, worse, or stay the same.

You then look at all the responses, weight the companies by size, business type, etc., and see whether, overall, they expect growth or contraction on a scale of one to 100.

So, 50 would mean no change, anything below means decline, and anything above signals expansion. The latest figure for the UK’s composite PMI, which covers the whole economy, is 52.5, meaning businesses are expecting reasonable growth, but not particularly fast.

But it is ahead of the United States with 52.3 and Japan with 51.1.

For Europe, the picture is much bleaker. For the Eurozone as a whole it is 47.9, for Germany it is 47.1 and for France a very dismal 44.2.

On the rise: UK services PMI input price index

On the rise: UK services PMI input price index

I find these numbers astonishing. British businesspeople are more optimistic than their peers in the United States and Japan, and far more than those on the continent, notably in Germany and France.

Yet, they were grossly underestimated and, to my knowledge, didn’t really have an impact on market sentiment.

I can’t really believe that the UK economy will actually overtake the US this year, but, barring a radical change in the PMIs, it will surely overtake Germany, France and the Eurozone as a whole .

> PMI: UK services sector growing at fastest pace in six months

So what to look for next?

Firstly, I expect growth in the UK to gradually improve this year. Simon French, economist at Panmure Gordon, forecasts 1.2 percent, which is well above consensus, but would be in line with these PMI indices. If confidence continues to strengthen, growth could exceed this figure.

Expect this improved outlook to spill over into markets

Second, this improved outlook is expected to flow through to markets as people understand the implications.

The UK market is undervalued, and if there is money to be made by buying UK companies cheaply, it will happen. One of the skills of a professional investor is to anticipate changes in perception – to get ahead of the herd.

Finally, expect the pound sterling to benefit as well. This too is undervalued.

It is impossible to predict this recovery, but it could well arrive in time for the summer holidays. It would be nice if that were the case.

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