UK PMI surveys raise further doubts about an August rate cut

Pricing pressures slowing, but growth and employment strengthening

The preliminary S&P Global/CIPS PMI surveys for July, released this morning, will be welcomed, in as much as all three surveys – services, manufacturing and the composite reading – all showed gains on the month. But for the Bank of England (BoE), as it deliberates whether to cut interest rates in August, the message being sent is something of a mixed bag, with inflationary pressures shown as slowing but with the outlook for both employment and confidence strengthening.

Doubts raised about a slowing labour market

The report of most interest is the composite PMI, a weighted average of the services PMI (which rose from 52.1 to 52.4) and the manufacturing PMI (which rose from 50.9 to 51.8), and where the economic outlook being presented can only be described as bullish. New orders, which had been put on hold ahead of the general election, are being rapidly reinstated, with overall activity in the private sector showing its sharpest upturn for some fifteen months. Alongside this expanding activity, employment growth is also showing its fastest pace of expansion for 13 months, with demand for labour outweighing redundancies and seeing the balance of job hirings to cuts rising from 50.3 to 52.3. But perhaps the most important story behind this pick-up in hiring is that employment is now rising faster than that implied by the PMI output balance, suggesting firms are hiring in advance of an expected acceleration in economic activity rather than unwinding labour hoarding as the BoE has been assuming. It means that the hoped for continued easing in the labour market that the BoE has been relying on to bring down services inflation, very much seen as necessary before interest rates can be cut, may not actually materialise.

Services PMI another headache for the BoE

The services PMI number also presents another potential headache for the BoE, with the overall strength of activity expanding alongside a strong increase in new orders, which rose from 51.6 to 55.3 on the month; it suggests the reading for August could potentially print as high as 55.0. And the outlook going forward also strengthened, rising to 74.2 from 69.5, taking the number above its long-term average of 71.0. While such a solid performance in the dominant sector of the UK economy will be welcome in terms of the outlook for growth, for the BoE it will likely be disconcerting, as it suggests pricing pressures in the sector look set to remain strong.

Pricing pressures still benign - for now

The small positive for the BoE is that the surveys show this overall stronger growth outlook is being accompanied by only a modest rise in input price pressures, while output prices are actually falling, the input price balance rose only slightly from 59.7 to 59.9, while the prices charged balance fell from last month’s 5-month high of 55.7 to 54.8. It suggests that the lack-lustre attitude being seen in consumer spending patterns, evidenced by still disappointing retail sales numbers, is continuing to exert downwards pressure on wholesale and retail margins. But for how long this pressure will persist for, in the face of potentially stronger growth and higher wages, looks questionable, and will be a big concern for the BoE.

Scales likely tipping further towards a September rate cut

Overall, therefore, the BoE will welcome the modestly better news presented on the inflation front but will be concerned about the potential inflationary consequences of accelerating growth and a strengthening labour market, particularly the upwards pressure this potentially presents for wages growth. As we have noted before, the decision on whether to cut interest rates in August remains a close call; today’s report probably tips the balance a little further in favouring a delay until September.