Data in the UK have taken an unequivocally positive turn. PMIs for services, construction and manufacturing are at 3 year highs. Furthermore, the underlying picture is healthy, with the new orders to inventory ratio for manufacturing surging to 1.4. This has resulted in growth forecasts being upgraded, including the OECD, which now sees annualized growth in 2H13 of 3.5%, compared to the BoE’s last estimate of 2.8%.
Still, we remain deeply skeptical that the UK economy is completely out of the woods. Similar conditions are now being created in the UK economy to those that preceded the financial crisis. The best example of this is obviously the mind-boggling Help-to-Buy scheme which socializes housing risk and encourages borrows to overlever themselves to get on the allured property ladder. The fact that the government can come up with a such a scheme only 5 years after one of the worst global financial crises since the 1930s continues to amaze us.
Thus, while we are seeing a clear upturn off a low base, it is highly unlikely the recovery will be sustainable. We are fundamentally bearish on GBP, although improving conditions and lopsided positioning having been caught out short will keep an underlying bid.
Nevertheless, we think reaffirmation of BoE “guidance” will have a weakening influence on sterling not to mention the fact that the UK current account deficit is now close to 4% of GDP. Such large external borrowing needs have only been seen twice in history; firstly during the oil crisis in the 1970s and secondly in 1989 in what was the initial run-up to the ERM crisis in 1992.