After suffering its sharpest fall since the financial crisis in the wake of the referendum, the services purchasing managers’ index (PMI) soared from 47.4 to 52.9 in August, smashing expectations on the index where scores below 50 indicate contraction.
Hours after the figures were released, both JP Morgan and Morgan Stanley revised up their expectations for the UK economy, having slashed their outlook in the aftermath of the vote.
Morgan Stanley is now predicting the UK will avoid a technical recession, defined as two consecutive quarters of contraction, to grow by 1.9 per cent this year. The bank had expected the UK economy would shrink by 0.4 per cent in the the third quarter of the year, but it now foresees growth of 0.3 per cent.
“Data has come in stronger than expected,” Morgan Stanley analysts said, adding: “Previously, we had expected an immediate reaction to the vote to leave. But in practice, the reaction has been muted, or rapidly reversed.”
JP Morgan also said it expects the UK to expand by 1.9 per cent this year, up from its post-vote forecast of 1.7 per cent. It said the latest PMI score “takes out the risk of a recession”.
Other economists also dismissed the idea of the UK entering a downturn. Martin Beck at the EY Item Club said: “The strong recovery … suggests that the likelihood of a recession this year is looking more remote”, and Kallum Pickering, a senior economist at Berenberg also said he expects “the UK will dodge a recession.”
The economy’s robust performance in the face of uncertainty over the terms of the UK’s relationship with the EU has also slightly eased the chances of the Bank of England slashing interest rates later this year.
The prospect of rates being cut to zero, or lower, in November’s meeting of the monetary policy committee (MPC), stood at 21.6 per cent yesterday, down from highs of 35.5 per cent in mid-August. Nevertheless, markets are still pricing in a small cut later this year, with governor Mark Carney previously indicating he would take rates to just above zero if growth stalled over the summer.
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