News & Analysis

The UK’s latest flash PMIs show an economy flatlining, but not to an extent that recession appears more likely than not. Today’s print of 48.6 leaves the last three readings essentially flat, and although below the breakeven 50 threshold, it is indicative of an economy set to stagnate over the coming months rather than contract outright.

On a relative basis this is welcome news, with readings for the eurozone pointing to a more severe downturn in the bloc. But for policymakers, today’s reading is unlikely to change much. Having strongly hinted that monetary policy is now set to remain on hold for an extended period, in part on concerns around economic growth, it would be surprising if today’s release helps tip the MPC into delivering a further rate hike in November. Even so, anecdotal evidence in the release is suggestive that the passthrough from wages to inflation may not have weakened as much as previously thought, a concern for policymakers that means the prospect of a final rate rise down the line cannot fully be taken off the table.

For now though, markets are taking the release at face value, resulting in a modest uptick in the pound particularly against the euro, as the UK’s relatively better growth outlook leads sterling to outperform.

 UK PMIs are relatively unchanged from September compared with continued decline in the eurozone

Perhaps the biggest takeaway from today’s PMI report was the UK’s relatively outperformance when compared with their European neighbours.

Indeed, the composite UK reading of 48.6 is markedly better than the aggregate Eurozone figure of 46.5, with the latter notably continuing to trend in the wrong direction following a modest uptick last month. Whilst this outperformance is not unexpected, especially given with real wages having turned positive which should in turn support UK consumer demand, it is welcome given signs that the UK’s inflation outlook is also broadly improving in response to the BoE’s monetary tightening. Notably, the small contractions across both the services and manufacturing sectors were accompanied by falling input price inflation. In particular, where price pressures continue to be experienced by firms, these were overwhelmingly the result of wage costs that based on other labour market indicators including ONS figures and the REC report on jobs, have now begun to normalise.

Today’s release was not all good news, however. Whilst input costs continued to slow, the report also noted that prices charged inflation accelerated to a three-month high in October.

Notably, this was driven by the services sector, with survey respondents looking to catch up with the impact of inflation pressures and limit the squeeze on operating margins. This is in sharp contrast to previous releases, which had instead observed that greater competition for work and falling demand had led to a reassessment of pricing strategies, suggesting that firms were happy to absorb wage costs instead of passing them on to consumers. That being said, the process of absorbing higher input costs was never likely to be smooth, something that policymakers will be well aware of. Therefore, whilst likely concerned that wage pass through may have picked up, today’s anecdotal evidence is unlikely to push policymakers into further rate hikes in the absence of other confirmatory data. For now at least, this is lacking. Signs of continued slowing in both the CPI and wage data, along with some grim retail sales figures released on Friday, should be more than enough to suggest that the risks from further monetary tightening are skewed to the downside, ultimately keeping the BoE on hold next month.

Nevertheless, with an extended hold from the BoE largely priced in by markets already, a better growth outlook versus the eurozone has seen the pound and UK yields outperform, climbing 0.3% against the euro on today’s data whilst holding its ground against the dollar.

 

 

Author: 

Nick Rees, FX Market Analyst

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