Good news on the economy—for now

Today's data showing substantial improvement in the services sector is good news and suggests that, in the third quarter at least, the UK will avoid a recession. The Purchasing Managers' Index (PMI) recovered from 47.4 in July to 52.9 in August, the biggest one-month gain in its 20-year history. It follows the sharp improvement in the manufacturing sector and a bounce back in consumer confidence, which dropped sharply after the shock referendum result.

There have been some special factors at play. Manufacturing demand and orders have benefited from the fall in the pound following the referendum—partly reversed in recent days, due to improved data and the decreased chance of an interest rate rise in the United States. The strong retail sales in July owed a lot to the poor showing in June, when wet weather kept shoppers off the high street. And overseas visitors have spent enthusiastically to take advantage of the weak pound.

So, were economic fears exaggerated? The jury is out. We haven’t left the European Union yet—and it is now clear that we are a long way from doing so. While this adds to the uncertainty, the economy cannot stand still for ever. And with Prime Minister Theresa May resisting calls for an early election, we at least have a government that seems set to last until 2020. But the economy had been improving before it was rudely interrupted by the "Leave" vote.

Many of the extra jobs created in the third quarter owe a lot to this earlier growth. At the same time and more importantly, government responses have been crucial. Mark Carney, the Governor of the Bank of England, has been much maligned but he rightly calmed the markets on the morning of 24th June by adding extra liquidity and followed up in August with a rate cut, quantitative easing, and promises of more action if needed. It looks like cheap and ample credit has helped. And Philip Hammond, the Chancellor of the Exchequer, has hinted at a reflationary autumn statement.

All this is reassuring. But uncertainty remains. On current trends, the PMI data suggests that the economy will grow by 0.1 per cent in the third quarter—still a big drop from the 0.6 per cent recorded in the second. A question mark still hangs over construction and private infrastructure spending, which are contracting. And the business sector is not out of the woods. The UK Economic Index of business and consumer confidence conducted by the and Centre for Economics and Business Research and YouGov showed a bounce to 109.7 and Markit’s PMI showed a similar change in sentiment among manufacturing firms. However, Lloyds Bank’s Business Barometer suggested a sharp decline in business confidence in August.

The difficulties of negotiating an exit from the EU and striking meaningful deals with anyone else are becoming increasingly apparent, in particular at the G20 meeting in China. And the markets to which we want to sell are hardly thriving. Many of the BRICS countries are in recession and in the eurozone, growth is flagging and confidence is still damaged by Brexit. It's a time to hold our breath and be thankful for the way in which our institutions have steadied the ship, but be wary of what may lie around the corner.