The specter of decision-making reappears after the Brexit referendum? The Bank of England is overly reliant on PMI, economists warn
Bank of England Governor Bailey stated that more emphasis will be placed on indicators such as PMI, but observers warn against repeating the mistakes made after the Brexit referendum in 2016. Although official data shows GDP growth rebounding to 0.7%, PMI indicates that economic growth is stagnating. Economist Robert Wood pointed out that Bailey may be misusing PMI as a basis for economic growth, as it has been overly pessimistic in predicting during times of rising uncertainty
According to Zhitong Finance APP, Bank of England Governor Andrew Bailey revealed last week that he will pay more attention to indicators such as the S&P Global Purchasing Managers' Index (PMI) and warned that "recent fluctuations in GDP data have increased." However, observers of the Bank of England caution against repeating the mistakes made after the 2016 Brexit referendum, when officials relaxed policies in response to surveys showing a sharp economic decline.
As the Bank of England decides on further interest rate cuts, these conflicting signals may complicate matters, as the Bank weighs concerns about rising inflation against economic worries caused by U.S. tariffs.
The Bank of England believes that the PMI is more stable than official economic growth data.
Official data shows that the UK's GDP growth rate rebounded strongly to 0.7% in the first quarter, the highest level in a year. However, the growth signals from the PMI present a more stable but stagnant picture—the Bank of England believes that this indicator better reflects the fundamental state of the economy.
The index showed almost zero growth in the first quarter. Due to uncertainty regarding Trump's tariff policies, the index fell into contraction territory in April and rebounded to flat in May.
Bailey told the Treasury Committee last week: "The challenge we face right now is that the forward-looking evidence regarding economic activity, namely survey results, is far from strong." He described this gap as "disconnected" and stated that Bank of England staff believe that private sector survey results are better predictors of future economic trends than previous GDP data.
Robert Wood, Chief UK Economist at Pantheon Macroeconomics, stated: "Bailey may risk repeating the mistakes made after the Brexit referendum by using weak PMIs as strong evidence of actual economic growth, but this indicator has proven to be very misleading."
He added: "There is strong evidence that when uncertainty rises, the PMI's predictions for economic growth are overly pessimistic, as the qualitative nature of the survey means it reflects sentiment rather than actual growth."
It is understood that the UK economy grew by 1.9% in 2016, consistent with the average level over the past six years, despite the political turmoil triggered by the Brexit referendum.
Weak forward-looking survey results.
Although the official data for the first quarter may have been boosted by temporary factors, as manufacturers shipped goods before U.S. tariffs took effect, there are also signs that the services sector, which accounts for the largest share of the UK economy, is performing strongly.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated: "There is also some evidence that since the outbreak of the pandemic, GDP data has shown strong seasonality, which is not evident in the PMI." However, economists also point out that PMIs have drawbacks, especially considering that they do not include specific sectors like retail and government activities.
Williamson stated, "But these surveys do cover about 80% of the economic output of the private sector, reflecting the spending of businesses and households, which is also the primary concern for policymakers and investors."
Affected by political news, the results of PMIs and other business and consumer surveys often see significant declines. Events such as Brexit, Liz Truss's disastrous mini-budget in 2022, and the Labour Party's first budget have led to substantial drops in survey results, while official data (such as GDP and unemployment rates) indicate that the economic fundamentals have not changed significantly.
However, the PMIs do align with the sluggish official data in the second half of 2023, when the cost of living crisis pushed the UK into a mild technical recession.
Ruth Gregory, Deputy Chief Economist at Capital Economics, stated, "The risk is that different indicators are sending different signals about demand, and the Bank of England needs more time to understand the forces driving economic growth."
