Chances of avoiding a technical recession have risen significantly - ITEM Club comments on today's 'encouraging' PMI services figures

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s PMI services figures:

  • This data raises the chances of avoiding a technical recession
  • But short-term prospects remain on a knife edge given the ongoing problems in the Eurozone
  • We still expect the Bank to go ahead and authorize another round of QE

“The PMI services figures are very encouraging, particularly as they follow the more robust manufacturing numbers from earlier in the week. The chances of avoiding a technical recession have risen significantly with this week’s data, particularly given that we’re also seeing the orders pipeline starting to strengthen, suggesting that the recovery may have some sustainability.
“However, short-term prospects remain on a knife-edge given the ongoing policy paralysis in the Eurozone. If the crisis deepens, it would most likely reverse all of the pickup seen in the last couple of months. The heightened level of uncertainty means that business sentiment is very fragile, so it’s difficult to envisage activity remaining this firm in future months unless there are more tangible signs of a positive resolution to the crisis.
“With this in mind, it would be a surprise if the MPC didn’t extend its QE programme when it meets next week. The last Inflation Report showed a substantial inflation undershoot at the two year horizon and even the more upbeat data of the last couple of months is unlikely to be sufficient to bridge that gap. The MPC is likely to see further QE as a good insurance policy against further Eurozone-related weakness, and as good support to the recent pickup.”