Further recovery in flash UK PMI read should ease recession fears

(Alliance News) - Business activity in the UK's service sector edged further into growth territory in December, according to preliminary survey data on Friday, which analysts said should ease recession fears.

The S&P Global/CIPS flash UK flash composite purchasing managers' index rose to 51.7 points in December from 50.7 in November. The reading came in better than expected and again above the 50-point mark that separates contraction from growth, with FXStreet consensus expecting the reading to come in at 50.9 points.

S&P noted that this pointed to the fastest rise in private sector business activity since June.

The flash services PMI business activity index climbed to 52.7 from 50.9. FXStreet were expecting the reading to come in at 51.0.

Meanwhile, the flash manufacturing PMI fells to 46.4, behind consensus of 47.5 and November's reading of 47.2.

"December's PMI survey provides further reassurance that a recession isn't developing, despite the fall in GDP in October," said Pantheon Macroeconomics analyst Samuel Tombs.

"The composite PMI exceeded 50 by a larger margin than in November, while the new orders index topped 50 for the first time since June. Confidence in the outlook for growth in demand over the next 12 months increased too and now is slightly above its 2012-to-19 average, as businesses start to anticipate stronger demand on the back of rising real wages and falling borrowing costs."

On Wednesday, the Office for National Statistics said UK gross domestic product fell by 0.3% in October from September, having risen by 0.2% in September from August. This was worse than expected. According to FXStreet market consensus, analysts were expecting GDP to fall by just 0.1% in October.

Ebury analyst Matthew Ryan argued an expanding UK economy boosted the argument against cutting interest rates too soon.

"The euro area economy appears to be barrelling towards a technical recession in the fourth quarter, at least if the latest business activity PMI data is anything to go by. The December composite index fell well short of consensus, following broad-based downturns in activity in both Germany and France, and has now remained pinned below the key level of 50 for seven straight months," said Ryan.

"By contrast, the UK economy looks to be in a much healthier state, with economic activity seemingly accelerating as we approach year-end...This should both quell investor concerns surrounding the possibility of a UK recession, and vindicate the Bank of England's' 'higher for longer' stance on interest rates."

For the eurozone, the Hamburg Commercial Bank flash composite purchasing managers' index fell to 47.0 points in December from 47.6 in November, according to survey results on Friday.

This marks a two-month low and falling further below the 50-point mark that separates contraction from growth, it shows the pace of deterioration accelerated this month.

The flash services PMI index fell to 48.1 points from 48.7, also a two month low, while the flash manufacturing PMI was unchanged at 44.2 points.

But Pantheon Macroeconomics' Tombs said the Bank of England's Monetary Policy Committee should not be concerned by the resilience of the UK economy.

"For a start, businesses still are hiring only cautiously. The composite employment index edged down to 49.2, from 49.8 in November, consistent with the PAYE Real-Time Information measure of employee numbers merely holding steady, and a further increase in the unemployment rate, due to ongoing growth in the workforce. In addition, the prices charged index of the services survey fell back to 57.7 in December, from 58.2 in November," said Tombs.

"At that level, we think it is consistent with month-to-month annualised growth in the services CPI, on a seasonally adjusted basis, of about 4.0%. That run rate is still too high for the MPC to tolerate indefinitely, but would represent substantial progress compared to the trend in the first nine months of this year, and if sustained, likely would reinforce the case for making monetary policy modestly less restrictive from around Q2 of next year."

The PMI data lends support to current market pricing that the MPC will be in a position to cut bank rate by around 100 basis points in 2024, Tombs said.

The BoE kept its bank rate at 5.25% on Thursday. It is the third successive hold, following one in September, which ended a streak of 14 consecutive hikes since December 2021, and one in November. The BoE had rapidly increased bank rate from a Covid-19-induced low of 0.10%.

It was a split outcome, with six Monetary Policy Committee members, Governor Andrew Bailey included, favouring the hold. Three would have preferred rates to have been lifted by 25 basis points, they were Megan Greene, Jonathan Haskel and Catherine Mann.

Numbers last month showed UK inflation cooled dramatically in October. The ONS said consumer prices rose 4.6% annually in October, dropping sharply from the 6.7% pace in September. The reading was lower market consensus of 4.8%, as cited by FXStreet, which was also the forecast from the Bank of England. The UK's October inflation figures will be published by the Office for National Statistics next week Wednesday.

Looking ahead, S&P said the degree of positive sentiment regarding the year ahead outlook for business activity edged up to its highest since September.

"The UK economy continues to dodge recession, with growth picking up some momentum at the end of the year to suggest that GDP stagnated over the fourth quarter as a whole. While employment meanwhile fell for a fourth month, the decline was only marginal and not indicative of any material rise in unemployment," said Chris Williamson, chief business economist at S&P Global.

"This is, however, a dual-speed economy, with manufacturing contracting sharply while services regained some poise, the latter growing faster in December thanks in part to financial services activity being buoyed by hopes of lower interest rates in 2024."

The flash PMIs are compiled by S&P Global from responses to surveys sent out to around 650 manufacturers and 650 service providers in the UK. Responses are collected in the second half of the month.

By Greg Rosenvinge, Alliance News senior reporter

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