Dismal picture for the UK economy painted by the August PMI numbers

All three of today's readings showed activty to be contracting

By Stuart Cole | @Stuart Cole | 23 August 2023


Today’s PMI data from the UK has painted a somewhat downbeat picture of the UK economy going forward. All three readings released today – the manufacturing, services and composite readings – are now in contractionary territory and all three came in below expectations.

The key number is the composite reading, and the reported print today of 47.9 is the first time this reading has been below the key 50.0 level since January and is the weakest print since January 2021. A figure above 50.0 indicates expanding activity while a figure below denotes activity is contracting. The reading ends what had been a six-month period of expansion and will reignite fears that the combination of the BoE’s interest rate rises, plus the increasing tax burden being imposed by the government, are finally causing economic activity to stall. Worryingly, the deterioration being seen is broad-based, although it is notable that the biggest component to fall in the composite reading was the new orders number, with potential buyers reported to be cutting back on purchases as higher borrowing costs and sluggish growth are hitting confidence about the strength of the economy going forward. Tellingly, the main support to activity was reported to be companies working through order backlogs, at the fastest pace for some three years; this points to further downwards pressure on activity as these backlogs are exhausted.

On a more positive note, inflationary pressures were reported to still be easing, with input costs now rising at their slowest pace for two-and-a-half years and suggesting that the downwards pressure starting to be seen on headline CPI will be maintained. The output prices balance of the services index fell to 56.2 from 59.4, consistent with a three-month-on-three-month annualised rate of growth in the “core services” CPI, as defined by the BoE’s Monetary Policy Committee, slowing to under 4% from 7.5% in July. If such an outcome is realised, then it would likely be sufficient to see the BoE ceasing raising interest rates any further. Less welcome, however, is the message that ongoing upwards pressure on wages continues to be seen, particularly in the services sector, with wages costs cited as the most common factor behind the rises in input costs that were reported. This will be a worry to the BoE, which has frequently cited the on-going strength of wages growth as a key factor preventing any easing in monetary policy.

Overall, what is clear is that inflationary pressures are finally starting to ease, but that the cost of this easing is slowing economic activity and a heightened risk of recession. But the BoE, just like the Fed, is in no mood to take any risks with inflation, having got the ‘transitory’ inflation argument so wrong, and therefore we still expect the MPC to raise interest rates by a further 25bps at its meeting next month.

Inflationary pressures are finally starting to ease, but the cost of this easing is slowing economic activity and a heightened risk of recession