UK PMI surveys signal solid start to Q4 but also record jump in cost inflation rate
Commenting on the October UK PMI survey results, expert from Markit, Chris Williamson, said:
Further signs that the UK economy is gaining further growth momentum is marred by news that inflationary pressures are rising rapidly. Growth of business activity picked up in October to its fastest since January with hiring also accelerating, but inflationary pressures also continued to build. A record jump in input cost inflation meant prices are increasing at the steepest rate for over five years.
Given the faster growth of both business activity and prices, it’s hard to see how the Bank of England would consider any further stimulus appropriate at this stage, though policymakers will most likely want to stand ready to act if the UK’s path to Brexit leads to any escalation of economic uncertainty.
Strong start to fourth quarter
The Markit/CIPS ‘all-sector’ PMI, covering services, manufacturing and construction, rose further from July’s Brexit-vote low, climbing from 53.8 in September to a nine-month high of 54.6 in October to signal a solid start to the fourth quarter.
The October PMI is consistent with the economy growing at a quarterly rate of just over 0.4%.
Key to the further upturn in the headline PMI was faster growth in the dominant service sector, where increased inflows of new business from customers and improved business expectations about the year ahead encouraged firms to raise activity levels to the greatest extent since January.
The service sector upturn follows further good news on the performance of manufacturing and construction. Factory output growth eased compared to September but remaining one of the fastest seen for over two years as export volumes rose markedly for a third successive month, buoyed by the weaker pound. Construction also grew, expanding for a second month running, representing a marked contrast to the steep declines seen in June and July.
Employment growth also continued to revive, reaching a six-month high when measured across the three sectors. The rate of job creation nevertheless remains far weaker than earlier in the year, with only modest gains seen in all three sectors reflecting widespread caution in taking on permanent staff amid an uncertain economic environment.
Costs surge higher
Hiring was also constrained by worries over rising costs. The PMI index covering input costs across the three sectors showed the largest monthly increase in 20 years of data collection, rising to its highest since March 2011, thanks largely to a surge in the number of firms reporting higher prices related to the weakened exchange rate. Over 90% of all manufacturers citing a reason for higher costs blamed the exchange rate to at least some extent. However, it wasn’t just goods producers that reported higher costs, with a sharp increase in input prices also signalled in both services and construction sectors.
Higher costs fed through to higher output prices. The October surveys signalled the largest monthly rise in average prices charged by companies for their goods and services since May 2011.
Steady growth for now
The survey results suggest that business conditions have continued to improve since the initial shock of the Brexit vote and ensuing collapse of the government. Anecdotal evidence from companies indicate that the more stable political environment and near-term outlook is supportive of ongoing growth, with the weaker exchange rate providing a notable fillip to exporters.
However, a marked upturn in price pressures resulting from the fall in the exchange rate is a key feature of the survey data and threatens to push inflation higher in the near term, which could in turn feed through to a squeeze on consumer spending. Business optimism also clearly remains fragile, and dependent on the government’s Brexit negotiations. For the moment, however, the surveys suggest that the economy is continuing to expand at an encouragingly solid pace.