The latest data suggest the economic recovery is losing momentum. The pound hit a nine-month low against the dollar as it emerged that the PMI index of activity in the services sector, which makes up around 75% of the economy, edged down in December. A sub-index covering business expectations fell to a three-year low. The PMI covering manufacturing declined to a three-month low in December. Meanwhile, household borrowing in November posted the largest monthly increase since before the crisis, a rise of £5.3bn. It is now rising at an annual pace of 3.2%.
What the commentators said
The services PMI should be taken with a pinch of salt, said Pantheon Macroeconomics. It only covers half of the sector, with retail and government services excluded. The odds of further growth in the latter are “bleak” given the “intensifying fiscal consolidation”, while the momentum in the retail sector appears to be ebbing. Early indications suggest that Christmas sales were nothing to get excited about. And the pace of consumer spending may ebb now that inflation is set to bounce back, lowering real wage growth, while job growth is set to slow in 2016 now that the unemployment rate has slid below pre-recession levels.
Growth probably came in at around 2.2% in 2015, according to Markit’s Chris Williamson, but 2016 could be tougher. The fall in business expectations suggests firms are “becoming more cautious in the face of growing uncertainties”, notably the cost of the living wage, government spending cuts, global growth jitters and the potential ramifications of Brexit.
The bigger picture, meanwhile, is that for all the talk of rebalancing the economy towards business investment and export-led growth, “this recovery, like others, will remain consumer-led”, said Andrew Smith of the Industry Forum. Still, it’s far too soon to panic about a private debt bubble bursting as it did in 2008. Measured as a proportion of disposable income, household debt has ticked up to 143% of disposable income, down from 165% before the crisis.
Nevertheless, firing on just the one usual cylinder does leave the economy looking exposed when interest rates finally rise and consumption slows.