UK gets "rare positive news" in November flash PMI, thanks to services

(Alliance News) - The UK economy edged back into growth territory in November, according to preliminary purchasing managers' index data on Thursday, which analysts said provided reassurance that the UK was not on the brink of a recession.

This was helped by the services sector returning to growth territory, offsetting a manufacturing sector that remained in contraction territory but faring better than it did in October.

The S&P Global/CIPS flash UK flash composite purchasing managers' index rose to 50.1 points in November, from 48.7 in October.

This marked a four-month-high and represents growth, edging above the no-change 50.0 mark.

The flash services PMI business activity index jumped to a four month high, registering 50.05 in November from 49.5 in October.

Meanwhile, the flash manufacturing PMI rose to 47.9 from 44.3. Whilst this marks a five-month-high, it also signifies the ninth consecutive month of contractions in the sector.

"We received some rare positive news on the state of Britain's economy this morning...The rebound in services activity, in particular, should somewhat allay concerns over the possibility of a UK recession, and we remain quietly hopeful that a contraction in GDP will be avoided in the final quarter of the year," said Ebury analyst Matthew Ryan.

On the inflation front, overall cost pressures across the private sector economy remained much softer than seen in the third quarter of 2023, S&P said. However, the rate of input price inflation accelerated slightly from October's 33-month low.

"The sharp easing in inflationary pressures should provide welcome relief to businesses, as should the growing likelihood that the Bank of England has already reached a peak in rates. That said, the outlook for Britain's economy remains far from rosy. According to today's data, total new orders declined for the fifth straight month, and export demand fell amid weak demand from abroad," said Ryan.

"At best, we expect only modest expansion in the UK economy in the coming months and, at worst, no more than a mild technical recession. This rather fragile growth outlook could act to hold back UK assets, and may present somewhat of a risk to our generally optimistic view on the pound."

Earlier this month, the BoE maintained UK interest rates at a 15-year high of 5.25%, a second-consecutive hold following one in September and ending a streak of 14 successive hikes since December 2021. The BoE had rapidly shot up the bank rate from a Covid-19-induced low of 0.10%.

UK consumer price inflation cooled dramatically in October, according to Office for National Statistics data on Wednesday last week. 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.

Looking ahead, S&P noted that the the latest survey pointed to resilient business activity expectations for the year ahead. The degree of optimism picked up from October's ten-month low, thanks to rising confidence in the service sector.

Tim Moore, economics director at S&P, commented: "The UK economy found its feet again in November as the service sector arrested a three-month sequence of decline and manufacturers began to report less severe cutbacks to production schedules.

"Relief at the pause in interest rate hikes and a clear slowdown in headline measures of inflation are helping to support business activity, although the latest survey data merely suggests broadly flat UK GDP in the final quarter of 2023."

Scope analyst Joshua Mahony was also positive on the state of the UK economy following the flash PMI read.

"Coming a day after the ONS upgraded their 2023 growth forecast, the UK economy has once again proved its robustness," he said.

But he also noted the ONS warning that UK inflation has become more domestically driven, and warned of further hikes.

"[This] has been reiterated this morning, with services sector prices charged by UK private sector firms increasing at the fastest pace since July. Higher wages may lessen the deterioration in living standards seen over the course of this crisis, but the BoE will be keen to see businesses normalise wages in a bid to drive down consumer prices," said Mahony.

"UK energy bills look set to rise 5% from January, thanks to the new price cap announced by Ofgem this morning. This sees the price of energy rise to the highest winter rate in history, with the lack of government support meaning that consumers are bearing the full brunt of the surge in gas prices in the wake of the Russia/Ukraine war.

"With the UK PMI survey back into expansion territory, and signs of continued inflation pressures, it is easy to see why markets still see a greater chance of an additional hike from the Bank of England (15%) compared with the [European Central Bank] (1%) and Federal Reserve (11%)."

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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