To us, the slowdown in growth is likely to outweigh high inflation rates, which will ultimately lead to a prudent Bank of England policy.
While latest economic data point to short term activity to run a little firmer early this year, we believe that the more generalized dynamism will be dominated by service activity that will not materially improve. Domestic demand – and in particular consumer spending – is likely to suffer from higher inflation, while wage growth remains low.
Also, manufacturing activity is unlikely to improve, as suggested by the recent (small) drop in the January PMI survey. Meanwhile, the construction sector is suffering. The latest PMI survey on construction suggests that weakness in the sector remains important. For instance, house building – the sector’s main driver of growth – slipped into contraction territory after a one year expansion.
A return to contraction in residential building activity was accompanied by near-stagnant commercial and civil engineering activity, with aggregate new orders declining.
Gero Jung - Chief Economist - Mirabaud AM