At about 10:45 this morning I turned to Jonathan Prynn, the Standard’s business editor, and asked what he made of the latest purchasing managers’ index (PMI) numbers. His answer was unprintable. In fairness, at fifteen minutes to deadline, I picked a bad time to bother him. But Jonathan is hardly alone in his view of the UK economy.
The figures tell the tale of a private sector declining at its fastest rate in two-and-a-half years, when the nation was enduring the second major Covid-19 lockdown. The August flash PMI reading fell unexpectedly to 47.9 (bear in mind a score of over 50 indicates growth, under 50 contraction). All this means the markets now expect interest rates to peak below 6 per cent.
In some ways, this represents a victory for the Bank of England. Its mandate is to maintain price stability and hit the target of 2 per cent inflation, something eagle-eyed readers will know it has not been wholly successful at achieving in recent times.
And it will do this even at the risk of recession. Indeed, eliciting negative growth may be the point. Back in March, the Monetary Policy Committee, which sets interest rates, said its “remit is clear that the inflation target applies at all times, reflecting the primacy of price stability in the UK monetary framework.” In other words, controlling inflation matters more than economic growth.
Which is just as well. Because those 14 successive rate rises are starting to have their desired effect. Demand has dampened, inflation is falling and input costs are rising at their slowest pace in over two years. If you’re on the lookout for other signs of a potential contraction, there’s July’s grim retail sales and employment, which is growing at its slowest pace since March. There are even signs that pay deals are cooling.
But the price for the economy as a whole has been brutal. Chris Williamson, chief business economist at S&P Global Markit Intelligence, is unsparing: “Barring pandemic lockdown months, this is one of the steepest contractions since the global financial crisis. The surveys signal GDP [is] set to fall by 0.2% in Q2 with worse likely to come.”
And so it came to pass. Despite all the chatter about the decline of tracker mortgages and rise of outright homeowners, it turns out that monetary policy still works. Eventually. But it is never cost-free. Higher rates create new problems, most notably the risk of a recession which would likely lead to job losses and even an under-shooting of the 2 per cent target.
As far as Governor Andrew Bailey is concerned, that is tomorrow’s problem. For you and me, it may feel a little more immediate.
In the comment pages, Martin Bentham warns that time is running out for Scotland Yard to show it is capable of change. Sarah Baxter calls ‘tech bro’ Vivek Ramaswamy the latest madman to rattle traditional US Republicans field. Rachel Johnson says ‘nannying London’ has become the city that treats us like babies. While David Ellis wants to end the debate: let’s pedestrianise Soho now.
And finally, Asian hornets have been confirmed in London for the first time. And I for one welcome our new insect overlords et cetera and so on...
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