Surveys hint at slowish turnaround
THIS week’s May purchasing managers’ indices (PMI) are expected to give a further boost to hopes of a recovery, with many economists now forecasting a return to positive growth in the second half of 2009, although they warn it will not be painless.
All three PMIs are expected to show that the rate of contraction is declining, adding to positive CBI service sector data and consumer confidence figures released last week.
The consensus forecast for manufacturing PMI is 44.5 and for services, 49.5 – just half a point from the critical 50 level that indicates unchanged activity. In the past a figure of 43.5 has been consistent with flat GDP growth. If the PMI data is as forecast then we could see a positive growth figure by as early as the third quarter of this year.
The severity of inventory destocking in the first quarter of this year suggests that there will be a corrective rebound in the second quarter as manufacturers look to restock their depleted inventories, which makes a positive figure in the second half more likely.
Alan Clarke, economist at BNP Paribas says that an improvement is unsurprising. “We have had such a huge contraction that when the cogs start whirring again, then by definition output has started to expand.”
However, rising unemployment and falling growth in company profits mean that there are doubts about the sustainability of a positive growth figure. The fundamental rebalancing of the UK economy will not allow a fast recovery and a large correction is still needed, casting further doubt over Alistair Darling’s 3.5 per cent forecast, says ING’s James Knightley.
He added: “Ongoing deleveraging, a higher savings rate, and continued restriction of credit all mean a lower rate of growth of 1.5-2 per cent per year compared to 2.5 per cent pre-recession. It’s a bumpy road ahead.”