UK PMI data "dour" as services sector is a "cause for concern" - Ebury

(Alliance News) - The latest purchasing managers' index figures for the UK private sector, which fell back into contraction in August, were "dour", according to analysis from Ebury on Wednesday, as renewed deterioration in the services sector "gives cause for concern".

The S&P Global/CIPS flash UK composite PMI fell to a 31-month low of 47.9 points in August from 50.8 in July, according to survey results published on Wednesday.

Coming in below the 50-point no-change mark, it shows the UK private sector has fallen into contraction. Market expectations had been for a reading of 50.3, according to FXStreet-cited consensus.

After a string of readings showing growth, the flash services PMI fell to a seven-month low of 48.7 points in August from 51.5 in July and compared to expectations of 50.8.

Manufacturing also deteriorated at a faster pace than expected, with the PMI falling to 42.5 from 45.3. It was a 39-month low and below market expectations of 45.0.

S&P Global said the contraction reflected a faster fall in new orders as clients became more cautious amid higher borrowing costs and "sluggish" domestic economic conditions.

Ebury analyst Matthew Ryan noted the latest read represented a collapse to its lowest level since the first winter Covid-19 lockdown in January 2021.

"The manufacturing sector remains incredibly fragile, notching its sixth consecutive monthly decline. Of even greater concern is the drop in the index for Britain’s dominant services sector, which has fallen below the key level of 50 that separates growth from contraction for the first time since January," said Ebury's Ryan.

"The recent moderation in UK inflation, particularly the drop in household energy prices, should be positive for the outlook, although clearly tighter monetary conditions are likely to provide a significant drag on growth in the coming months."

Annually, UK consumer prices rose by 6.8% in July, cooling from a 7.9% jump in June, according to figures from Office for National Statistics on Wednesday last week. S&P Gloal noted easing inflationary pressures over August, but alongside "many reports" of persistently strong wage pressures.

ING analyst James Smith also labelled the flash UK PMI data as "unquestionably bad", arguing it will the Bank of England "pause for thought" as it nears the end of its tightening cycle.

"For now, the Bank of England doesn't seem to be been putting too much emphasis on the growth numbers, with its focus still almost entirely on inflation. And on that score, policymakers won’t like the references in the latest PMI press release to persistently strong wage pressures. Still, the PMIs also reveal that prices charged by corporates are increasing at the slowest rate since February 2021, and that echoes what we’ve seen in various other surveys too," said Smith.

"Ultimately, the Bank of England appears wary about putting too much weight on survey data, while official numbers on wage growth and services inflation continue to come in higher. But much like the recent increase in unemployment and ongoing fall in vacancy numbers, today's PMIs show that the economy does appear to be turning from a state of very modest growth to stagnation and perhaps even modest recession.

Earlier this month, the UK central bank enacted its fourteenth successive interest rate hike, lifting bank rate by 25 basis points to 5.25%. Across the world, central banks have been raising interest rates in a bid to curb inflation.

ING's Smith continued: "As time goes on, the BoE's laser-focus on inflation/wages, both of which are heavily lagging indicators of economic activity, means the risks of overtightening have risen."

Ebury's Ryan speculated that further 25 basis point rate hikes were likely before the end of the year.

"Today's data suggests we are now seeing clear evidence that higher rates are dampening consumer demand, as higher mortgage payments squeeze household purchasing power. Sterling has come off sharply so far today, as investors bet that the slowdown in the UK economy will elicit a more cautious approach from the Bank of England during upcoming [Monetary Policy Committee] meetings," said Ryan.

"We still see at least a couple more 25 basis point hikes as likely before year-end, although we may begin to see a more vocal dovish dissent among the committee, as policymakers balance high core inflation with an economy verging on stagnation."

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 reporter

Comments and questions to [email protected]

Copyright 2023 Alliance News Ltd. All Rights Reserved.