Services sector damps down savers hopes for rate rises

Has Britain’s huge services sector spoiled savers’ plans for a modest interest rate rising party?

Bank of England governor Mark Carney created a flurry of excitement on Thursday when he announced that the central bank had lifted its growth forecasts and indicated that we may be in for faster base rate rises as a result.

Cue a frenzy of pointy headed scribbling from the City’s pointy headed scribblers.

There’ll be a lot more scribbling done today after the the IHS Markit/Cips UK Purchasing Managers (PMI) index covering the dominant part of UK plc tried to rain on his parade.

It rose to 50.4 in April, with 50 indicating growth. That represents an improvement on the previous month in which the sector shrank, recording 48.9.

But as a recovery it’s about powerful as a broken down lawn mower engine.

It’s de rigueur in any discussion of economic data to provide a point of context. In the case of this one, the last two months represent the weakest performance signalled by this dataset for six years.

Carney, however, said he believed that surveys like this one may be over stating “Brexit uncertainty”. An example of the Bank being infected by the Brexiteer disease that holds that you’re a bally traitor if you display anything other than mindless optimism about their crazy project?

That’s pushing it. Carney merely thinks investors are being too dovish and that even a modest improvement in the UK’s outlook would require remedial action from the central bank. Anything above 1.5 per cent - which would hardly put the UK in the class of the Jaguar cars that won’t be being made here for much longer - would do it.

This, he thinks, is a realistic prospect if the Brexit impasse is finally resolved. He also appears to be ruling out a no deal.

He may very well be guilty of underestimating the depths to which the Tory Party is prepared to sink. Perhaps it’s because he most often talks to Philip Hammond, who is on it’s semi sensible wing.

Regardless, savers shouldn't get too excited about an improvement on the dismal returns they're currently getting.

Back to those services figures. Chris Williamson, the chief business economist at IHS Markit, tweeted a couple of important points upon their release. He produced a graph showing that the official GDP data has diverged somewhat from the PMI recently, which does happen every now and again.

But long term they’re quite closely aligned and he noted that it would be “highly unusual for the economy to at least not lose substantial momentum when the PMI has sunk to current levels for more than one month”. The services sector accounts for 80 per cent of the UK's output, covering everything from City banks to the small dry cleaners where their employees take their suits.

The uncertainty is there. It’s real, and it’s having an impact. And it doesn’t look like it's going away soon.