The yawning gap between buoyant economic surveys and weak official data on Britain’s economic output has started to close, with a raft of disappointing business and consumer confidence figures indicating the UK economy is facing further weakness.
The European Commission’s latest UK economic sentiment indicator, published on Tuesday, fell from 110.5 in April to 108.2 in May, with large drops in confidence in the services and construction and sectors.
The Commission’s consumer confidence indicator also dropped this month, to its lowest level since last November.
A Lloyds Banking Group survey out on Wednesday showed a stark drop in the net balance of companies reporting an improvement in their business prospects, from 60 per cent in April to just 26 per cent in May. This plunge in confidence, which Lloyds said might be temporary, dragged down its overall business confidence indicator to its lowest level since September last year.
While the signals remain mixed — retail sales bounced back in April, beating analysts’ expectations — the dip in confidence reflected in the European Commission and Lloyds surveys suggests that the divergence between so-called “soft” and “hard” data in recent months may be drawing to a close.
The UK economy has been plagued by stubbornly mediocre official statistics since the start of the year. GDP grew only 0.2 per cent in the first quarter, a third of the 0.6 per cent rate recorded in the fourth quarter of last year. Manufacturing and construction output have now
fallen for three successive months, according to official statistics.
But at the same time, surveys of British businesses have found firms’ confidence at near record levels. For example, the most recent Markit/CIPS surveys of purchasing managers in manufacturing, construction and services signalled faster growth in all three sectors in April, compared to the previous month.
The relatively strong PMI figures have been matched by robust surveys of output and orders from the CBI employers group. Indicators of retail spending for April from the British Retail Consortium were also strong.
Directors across the country have reported similar optimism.
Nick Kelsall, chief executive of Norcros, a London-listed company that is based in Cheshire and makes tiles and bathroom fittings, said last month that a post-referendum slowdown is tailing off, adding that while many consumers were still cautious about spending, builders were ramping up demand.
“There was a kneejerk reaction. Businesses wanted to conserve capital and there was destocking in the supply chain,” he said. “But the second half [to March] has been much stronger than the first”.
Bruno Jouan, who runs VTL, an automotive parts supplier based in Huddersfield in West Yorkshire, said that while he thinks his company is less likely to win European contracts following last year’s Brexit v
ote, he remains confident in its domestic business: “I think more tier-one suppliers and manufacturers will want to place orders here and bring business back to the UK.”
But with previously buoyant surveys dipping to align with weaker hard data, some experts are now questioning what purpose there is in tracking companies’ sentiments, rather than waiting for official figures.
Economists working to produce the surveys say they give an early indication of future economic prospects, and that their recent readings still suggest that official economic data will improve in the second quarter.
Some more independent economists agree.
Ruth Gregory of Capital Economics said that while surveys provided an overly optimistic picture of the economy in the first quarter, they are still useful in suggesting a recovery in the growth rate after March.
The surveys “usually give us a good indication about the direction of travel … [and] the strength in April’s retail sales figures tallies with the evidence from the surveys in the second quarter so far,” she said.
But Samuel Tombs of Pantheon Macroeconomics said he is worried that the surveys have exaggerated optimism among firms.
“People always put too much weight on the surveys, and if you’re trying to predict quarterly growth, they aren’t very useful,” he said.
He added that many widely-cited business surveys do not cover the entire economy, have small sample sizes and can be skewed by managers confusing sales increases due to higher prices for real gains in output or orders.
Other economists say surveys have been reflecting executives’ optimism, rather than the true performance of their companies.
Erik Britton of Fathom Consulting said that while surveys should not be dismissed, there are reasons to be cautious about their current optimism.
“The important concept is what is the ratio of signal to noise in business surveys,” he said. “The evidence says it is more like 10 to 90, so it is not safe to draw strong conclusions”.