The UK economy is growing well, but some doubts are emerging, next week’s numbers could show.
Purchasing managers should report on Tuesday that manufacturing output is growing strongly – perhaps at its fastest rate since 2011. They might even add that construction activity, which has been weak since mid-2016, is also perking up thanks to increased housebuilding. On top of this, they should also report that the service sector is growing steadily. All this would be consistent with GDP continuing to grow at around 0.5 per cent per quarter.
A big reason for this is that our trading partners are also doing well; purchasing managers in the eurozone should confirm flash estimates that pointed to the economy doing very well in December.
However, purchasing managers in the US might report that growth has slowed to a five-month low. This shouldn’t be too worrying, though, as the pace will stay strong: Friday’s numbers should show another rise in non-farm payrolls of over 200,000.
What might be more concerning would be Chinese purchasing managers’ reports. These could show that growth has slowed to almost a standstill; this would be consistent with the slowdown in M2 growth earlier this year. If past relationships continue to hold, this could be bad for commodity prices and hence mining stocks.
Another warning for the UK economy might come from Bank of England data on Thursday. These will probably show that bank lending to companies is weak, with lending to small and medium sized ones barely growing at all over the last 12 months; this would be consistent with economists’ expectations for only weak capital spending growth in 2018.
The numbers could also show a slowdown in consumer credit growth, which would be at least partly due to tighter lending standards. And they could confirm the trend of recent months for mortgage approvals to decline. This would be consistent with the belief of many economists that house prices might fall in real terms in 2018.
Overseas, we’ll see the continuation of a big puzzle – that strong economic activity has not (yet) ignited inflation. In the eurozone, the core inflation rate should stay around 1.1 per cent, which would be lower than we saw in the summer. And in the US, wage growth is likely to be stuck around 2.5 per cent – as it has been since mid-2016 – despite unemployment dropping to a 17-year low. This combination of decent growth plus low inflation should, in principle, be good for equities.
