By Andy Bruce
LONDON (Reuters) – Optimism among companies in Britain’s dominant services sector surged after Prime Minister Boris Johnson’s landslide election win last month, despite continued economic stagnation, a business survey showed on Monday.
The business expectations component of the IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI) hit its highest level since September 2018, while order books increased for the first time in four months.
The overall PMI in December improved to 50.0 from a preliminary reading for the month – based on responses before the election – of 49.0. It was also higher than November’s 49.3.
Still, the index has not exceeded the 50 threshold denoting growth since August – the longest run below that mark since 2009 – and survey compiler IHS Markit said its readings were consistent with no growth in the economy in the fourth quarter.
Investors are watching for early signs of the impact of Johnson’s emphatic victory over the opposition Labour Party under left-wing leader Jeremy Corbyn, and sterling – already on a rising trend on Monday – rose modestly after the PMI report.
“Today’s release suggests that there could be a post-election bounce in the data over the next few months as confidence improves,” said Thomas Pugh, UK economist at consultancy Capital Economics.
“If this is confirmed in January and February then it should be enough to convince the Bank (of England) to keep rates at 0.75%.”
The upward revision to the business expectations index was the largest in the services PMI since mid-2015.
(GRAPHIC: Decisive election result cheers UK businesses – https://fingfx.thomsonreuters.com/gfx/polling/1/648/644/final%20flash.png)
Johnson’s success in winning a large parliamentary majority means Britain is on course to leave the European Union on Jan. 31 and start an 11-month, no-change transition period.
But some businesses are worried that his refusal to contemplate asking for an extension to the transition, even if Britain has not sealed a new trade deal with the EU before the end of the year, risks creating another Brexit “cliff edge.”
“I would be surprised if optimism is sustained, unless Boris Johnson extends (the) transition (or) finds ways to deepen the trade agreement,” John Springford, deputy director at the Centre for European Reform think tank, said of the PMI.
The composite PMI, which combines the services and manufacturing output indexes, held at 49.3 in December, matching September’s 38-month low, but better than the preliminary estimate of 48.5.
The final PMI for the services sector was based on responses gathered between Dec. 5 and 19, either side of the Dec. 12 election. The preliminary PMI was based on responses between Dec. 5 and 12.
(Editing by Hugh Lawson and John Stonestreet)