Decision-making ghosts reappear after Brexit referendum? Bank of England's bias towards PMI warned by economists.

Last week, Bank of England Governor Bailey revealed that he would pay more attention to indicators such as the Standard & Poor's Global Purchasing Managers' Index (PMI) and warned that "recent Gross Domestic Product (GDP) data has become more volatile." However, observers at the Bank of England warned against repeating the mistakes made after the 2016 Brexit referendum, when officials relaxed policies in response to a sharp economic downturn revealed by surveys. As the Bank of England decides on further interest rate cuts, these conflicting signals may complicate the situation further, as the Bank of England balances rising inflation with economic concerns caused by US tariffs. The Bank of England believes PMI is more stable than official economic growth data Official data shows that UK GDP growth rebounded strongly to 0.7% in the first quarter, the highest level in a year. However, the growth signals from PMI present a more stable but stagnant picture - the Bank of England believes that this indicator better reflects the true state of the economy. The index almost showed zero growth in the first quarter. Due to uncertainty among businesses about Trump's tariff policies, the index fell into contraction territory in April and rebounded to flat in May. Bailey told the Parliamentary Treasury Committee last week, "The challenge we face currently is that future evidence on economic activity, such as survey results, isn't as strong." He called this gap "disjointed" and said Bank of England staff believe that survey results from the private sector are more indicative of future economic trends than previous GDP data. Robert Wood, Chief UK Economist at Pantheon Macroeconomics, said, "Bailey may be in danger of repeating the mistakes made after the Brexit referendum, using the weak PMI as strong evidence of actual economic growth, but the fact is that this indicator can be very misleading." He said, "There is strong evidence that when uncertainty rises, PMI's forecasts of economic growth are overly pessimistic because the qualitative nature of the survey means it reflects sentiment rather than actual growth." It is understood that the UK economy grew by 1.9% in 2016, consistent with the average level of the previous six years, despite political turmoil sparked by the Brexit referendum. Weak forward-looking survey results Despite the official data in the first quarter possibly being boosted by temporary factors, such as manufacturers shipping goods before US tariffs took effect, there are signs that the largest sector of the UK economy, the services industry, performed strongly. Chris Williamson, Chief Business Economist at Standard & Poor's Global Market Intelligence, said, "There is also some evidence that GDP data has shown pronounced seasonality since the outbreak of the pandemic, which is not so clear in the PMI." However, economists also noted drawbacks of using PMI, especially considering that it does not include specific industries like retail and government activities. Williamson said, "But these surveys do cover around 80% of economic output in the private sector, reflecting spending by businesses and households, which are the primary concerns for policymakers and investors." Political news can also have a significant impact on PMI and other business and consumer surveys. Results from surveys have plummeted due to events such as Brexit, the 2022 disastrous mini-budget of Liz Truss, and the Labour Party's first budget, while official data (such as GDP and unemployment rate) showed no significant changes in the economic fundamentals. However, PMI did align with the sluggish official data in the second half of 2023, when a cost of living crisis led to a mild technical recession in the UK. Ruth Gregory, Deputy Chief Economist at Capital Economics, said, "The risk is that different indicators are sending different signals about demand, and the Bank of England needs more time to understand the forces driving economic development."