UK: Too early to get excited about the UK economy – BMO CM

Jennifer Lee, Senior Economist at BMO Capital Markets, suggests that in spite of a flurry of robust economic releases, it is too early to get excited about the UK economy.

Key Quotes

“Yes, it is encouraging that the U.K. economy had a good start to Q2: Markit’s manufacturing PMI hit a 3-year high in April, the construction, services and composite PMIs hit 4-month highs, and the CBI reported that retail sales advanced at their fastest rate in 19 months. Consumers are also getting some relief on the price front, with services inflation rising just 2.1% y/y in March, the 2nd slowest pace since at least the late 90s. That’s pretty impressive, nine months after the referendum, and has some market-watchers hopeful that Brexit will not be as crushing on the economy and on the currency as some feared. (Recall the BoE slashed growth forecasts just two months after the vote.)”

“But, frankly, we won’t know the full outcome for years, after the negotiations are hammered out and things settle down. And recall that it was just over a month ago that PM May triggered Article 50. Official talks probably won’t begin until after the June 8th general election, but already, the relationship has turned sour. As one media outlet put it, the “knives are out”. An innocent, “constructive” dinner between the leaders—PM May and the EU’s Juncker—turned into a “he said/she said” scuffle, on ‘leaked’ reports that Mr. Juncker was “10 times more sceptical than I was before” after the dinner. A war of words erupted.”

“PM May accused the EU of issuing “threats against Britain… deliberately timed to affect the result of the general election”. Mr. Juncker told reporters that “I have the impression sometimes that our British friends—not all of them—underestimate the technical difficulties we have to face”. Then, the EU released an estimate of the U.K. exit bill, payable upfront, totalling €100 bln, much higher than initial estimates of about €60 bln. In the words of Brexit Secretary David Davis, “we will not be paying €100 bln”. Did I mention that official talks haven’t begun yet?”

“In the Euro Area, economic activity is also gaining momentum, as evidenced by sixyear high manufacturing, services and composite PMIs. And much ink was spilled on the fact that Euro Area Q1 GDP grew faster than the U.S. But that does not mean the ECB will pull the trigger on QE tapering. Not yet, anyway. While they may be more comfortable now discussing an exit, policymakers want to see inflation head higher, for more than a couple of months, and be self-sustaining and for most countries. And so far, the ECB sees no convincing upward momentum in underlying inflation.”

“Bottom Line: It’s a little too soon to change the ECB assessment."