UK PMIs point to cooling rates of economic growth and job creation
Expert from Markit, Chris Williamson comments on July’s UK PMI survey results.
“The pace of UK economic growth slowed at the start of the third quarter, according to PMI survey data. Although still robust, the expansion of activity was the second-weakest seen so far this year after the general election-related slowdown in May. The rate of growth has eased in recent months due to the headwinds of a strong pound, sluggish business investment, eurozone uncertainty and weak global demand.
“However, although the weighted Output Index of the three Markit/CIPS PMI surveys fell from 57.4 in June to 56.7 in July, it remains consistent with solid economic growth. The pace of expansion of GDP looks to have merely eased from an impressive 0.7% in the second quarter to 0.6% at the start of the third quarter (see here for further details of mapping the PMI against GDP). If growth holds at this pace, the economy is on course to expand by 2.6% in 2015.
“While the slowdown in business activity signalled by the surveys was only modest, the hiring trend was more worrying. Employment growth fell sharply to the lowest since September 2013.
Mixed signals for Bank of England
“Despite falling, the PMI remains at a level which has encouraged the Bank of England to tighten policy in the past (see final chart), which will add to the hawkish mood among a divided Monetary Policy Committee. However, there are plenty of excuses to hold off from hiking interest rates any time soon, including zero inflation, a waning rate of job creation, a strong pound hurting exports and the latest signs of growth cooling. Policymakers will also be concerned about the global economic outlook, and slower growth in emerging markets in particular, which the manufacturing PMI showed to have slipped back into contraction in July.
“While a rate hike later this year remains a distinct possibility, the majority of Monetary Policy Committee members will most likely want to see stronger numbers than today’s PMI before feeling comfortable about voting for higher interest rates.
Service sector-led growth
“Growth continued to be led by the service sector, which the PMI indicates grew at a quarterly rate of 0.6% at the start of the third quarter, though that’s down from 0.7% in the second quarter, reflecting a dip in the PMI in July.
“Robust growth was also seen in the construction industry, for which solid PMI readings indicate far healthier business conditions than recent flat official data seen so far this year, the quality of which the strong survey data continue to question. However, it is evident from the PMI data that the building industry has seen growth slow considerably over the past year, with the rate of expansion easing in the housing, commercial and civil engineering sectors alike.
“The worst performance was seen in the manufacturing sector, where the weakness of the PMI is pointing to goods production acting as a marginal drag on the economy again at the start of the third quarter. Factory production fell 0.3% in the second quarter.
“The PMI data therefore suggest that economic growth remained disappointingly unbalanced in July, with a dependence on service sector growth while manufacturing struggles.”
