Threat of a technical recession has disappeared – ITEM Club comments on today’s PMI services data

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

  • This completes the set of positive PMI releases
  • Firms appear more confident, so are pushing through spending plans that were previously on hold
  • But the UK’s growth is still likely to be bumpy in the short term

“This completes the set of positive PMI releases for March. and our estimates, based on the monthly official data already available and the business surveys, suggest that GDP is likely to have grown by at least 0.3% in 2012Q1, reversing the decline of 2011Q4.
“What is even more encouraging is the firm pick-up in new business and the increased level of enquires, which suggests that this upturn has legs. We appear to be seeing an improvement in business-to-business spending in particular, which seems to be a result of greater corporate confidence. Many firms put their spending plans on hold at the back end of last year, because of concerns over the escalation of the Eurozone crisis and its impact on growth prospects. However, central bank policy action and greater stability in financial markets have helped to support confidence and firms now appear to be revisiting these plans.
“Although this week’s PMI surveys have been universally positive, suggesting that underlying growth prospects are improving, we are still in for a bumpy rise over the first half of the year. The additional Bank Holiday for the Queen’s Diamond Jubilee in June provides a formidable obstacle to continuing the Q1 recovery and, because of this factor, we still expect GDP to decline modestly in Q2.
“There is little prospect of any change in policy being announced at tomorrow’s MPC meeting, given that we are midway through a tranche of asset purchases. But this week’s PMI results are significant in terms of the May meeting. If these strong results can be sustained into April then it is likely to be the final nail in the coffin for another round of quantitative easing.”