UK’s economic recovery is starting to stutter

Latest financial data now shows that the UK’s economic recovery is starting to stutter. May’s CIPS manufacturing survey suggests that industrial sector has started to contract again. The fall in the overall PMI from 54.4 to 52.1 was primarily driven by a slump in the output balance from 56.3 to 49.9. On past form, that leaves the balance consistent with quarterly falls in manufacturing output of around 1%.

It now seems likely that some of this weakness reflects the temporary disruption to supply chains caused by the Japanese earthquake. Production should therefore bounce back in future months. But note that the new orders balance also fell from 50.8 to 48.3, suggesting that, beneath the monthly volatility, a sharp underlying slowdown in demand is taking place in the UK.

Mortgage approvals (another useful barometer in the overall economy) have fallen back for new house purchase from 47,145 to 45,166. Activity in March was probably boosted ahead of April’s rise in stamp duty on £1m plus properties, while the shorter working moth and bank holidays may have also depressed mortgage market activity in April.

Overall the UK economy is still precariously balanced with inflation well in excess of government target and a growing number of high profile economists again questioning how long interest rates can remain at the current rate of 0.5%.