The Bank of England’s (BoE) quarterly report England raised its UK growth forecast for this year. In part because the outlook for the global economy is a bit brighter.

Modest growth in services sector.

As the threat of a no deal Brexit lessened, data from the country’s dominant services sector showed modest growth. Consequently, The UK’s economy recovered some of its momentum last month.

After contracting for a short time in March Services companies returned to positive territory.

Further data revealed in an IHS Markit CIPS survey that a dive in manufacturing exports was offset by a mild recovery in the construction sector.

Experts said the figures indicated the UK economy was moving ahead but with a reliance on stockpiling, in case of a disorderly Brexit, rather than new orders to boost activity.

The IHS Markit CIPS services sector purchasing managers’ index (PMI) edged higher to 50.4.  Up from March’s 32-month low of 48.9. Earlier in the week, a survey of manufacturers found the headline PMI slipped back to 53.1 last month from 55.1 in March. The construction sector rose to a three-month high of 50.5 in April from March’s 49.7.  Anything above 50.0 indicates expansion rather than contraction.

Chris Williamson, chief business economist at IHS Markit, said:

Taken together the PMIs suggest the UK economy remained weak going into the second quarter of the year.

He said:

“The resulting rise in business activity signalled collectively by April’s PMI surveys was only marginal.”

“All three sectors were, therefore, struggling to sustain growth of output and hiring in April, and appear set for further weakness in the near term. Both GDP and labour market data could, therefore, disappoint as we move into the second quarter.”

“The PMI surveys recorded the third (albeit very modest) drop in employment seen so far this year, with marginal cuts to headcounts registered in all three sectors.”
“Reduced headcounts also in part reflected widespread uncertainty about future business conditions linked in part to worries easing in relation to a potential ‘no-deal’ or ‘hard’ Brexit.”

The Bank of England 

Meanwhile, the governor of the BoE Mark Carney says. Interest rate increases could be “more frequent” than expected if the economy performs as the Bank of England is expecting.

The markets are forecasting just one interest rate increase by 2021.

But if there is a resolution to the Brexit impasse, and inflation and growth continue to pick-up, then more increases are likely, Mr. Carney said.

As expected, the Bank kept interest rates on hold at 0.75% at its latest policy meeting. Interest rates stayed at 0.75% since last August, when the Bank raised them by a quarter of a percentage point.

Over the next two years, the Bank is expecting growth and inflation to pick up.

In a news conference, Mr. Carney said: “If something broadly like this forecast comes to pass… it will require interest rate increases over that period and it will require more, and more frequent interest rate increases, than the market currently expects.”

The Bank’s forecasts are based on a “smooth adjustment” to any new trading relationship with the European Union.

 UK growth forecast.

The Bank now sees growth of 1.5% this year, up from February’s forecast of 1.2%.

Economic growth has been subdued since the UK voted in June 2016 to leave the EU.

In particular, business investment has been falling.

Stockpiling has been giving the economy a short-term boost, but for this year, the strengthening of the global economy will have a more important effect, say the Bank.

In the minutes from its latest policy meeting, the Bank said:

“global growth had shown signs of stabilisation, and had been a little better than expected”.

It also forecasts the unemployment rate will continue falling in the coming years to 3.5% by 2022, which would be the lowest rate since 1973

The  BoE made clear that all its forecasts were based on the UK achieving a smooth Brexit and a transition deal that allowed businesses to plan for a new arrangement with trading partners in the EU.

growth forecast