UK PMI Hits Low
Sterling is falling against the US dollar this morning after the April manufacturing PMI has come in weaker than expected at 54.6, the lowest in seven months. Inflation is the third highest since the data was first collected in 1999. David Kohl, deputy chief economist at Julius Baer, says "these disappointing numbers give more room to wait longer to keep monetary stance very expansionary".
The problem with his analysis, however is he says that the expansionary monetary policy will help maintain growth until the effect of fiscal consolidation "kicks in". The effect has already kicked in. That’s why the PMI is dropping. Austerity means fiscal contraction. And contraction means reduction. So, clearly, if you cut government expenditure it results in a reduction in economic activity over the medium term. The question is whether the reduction is warranted in terms of aiding longer-term growth; and there, the data are less clear. If you told me the UK was moving away from a finance-based economic model or allowing some sort of resource reallocation to take place, I could understand how a temporary reduction in employment and output would lead to longer-term growth. But, in the absence of a redistribution of scarce resources fiscal contraction just means contraction.
Perhaps Kohl means the UK needs to work from a lower base because much of its previous GDP growth was illusory. But that’s a different argument. Can you think of other arguments?
Bottom line: if you are a UK consumer, you are being squeezed by fiscal consolidation and rising inflation. It’s not a pretty picture. This is what I have been expecting to occur in the US.