UK PMIs, investments send early and better clarity to infer for most likely BOE easing tomorrow

As the British PMI for the manufacturing sector has missed the forecasts recently, a downward shift already would mean that sentiments are certainly not conducive for business in the UK, (actual 48.2 versus forecasts 49.1 and previous 49.1).

The focus today is likely to be on the final result of the equivalent for the service sector. According to the flash estimate, the index had fallen to the lowest level since records began as a result of the Brexit shock.

It would now require an exceptional upwards revision to put the result into perspective and to dampen speculation about monetary policy easing tomorrow. I don’t believe this will happen, and therefore expect to see continued GBP weakness.

Short-term, two factors will shape the economic outlook, and not just for the UK, the extent of the policy uncertainty shock and the degree and durability of the financial market response. For the policy uncertainty shock, we assume that it will remain at an elevated level in both the UK and the euro area. Turning to the financial market shock, we have drawn on the work.

We expect growth will be hit by 0.2pp in 2016 but then by 0.7pp in each of 2017 and 2018 as the uncertainty shock reverberates across the economy. It is another 1pp lower by 2020. Business investment should suffer as companies take fright at the prospect of not only reduced export demand but also of weaker domestic demand. We see investment falling by over 2% in 2017.

On the assumption that the government negotiates a deal that achieves an (imperfect) approximation to continuing access to the single market we would expect the damage to business sentiment to then gradually lessen. We expect the BoE to cut rates to zero and restart QE. The MPC will look through the inflation spike and focus instead on the growth implications.

EURGBP forecasts are at 0.86, 0.90 and 0.85 in next 1, 3 and 12 months.