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UK Economy in Contractionary Territory Suggest Flash PMIs

UK economy

© Auremar, Adobe Stock

The UK economy looked to have been in reverse gear in November, with the first ever set of flash PMIs for the UK's services and manufacturing sectors from IHS Markit showing the dominant services sector contracted.

Services PMI read at 48.6, while the Manufacturing PMI read at 48.3.

Anything below 50 signifies the sector is in contraction.

"Data out of UK does not look promising. Might have just tipped one more within the MPC to vote for an 'insurance' rate cut at Dec 19 meeting (depending on election obviously). Still think MPC will wait for new year before deciding to cut. A lot could change by then," says Viraj Patel, a foreign exchange strategist with Arkera.

IHS Markit, who compiled the PMI survey, say the reason for the economy's lacklustre performance remains ongoing Brexit uncertainty, "reports from survey respondents largely attributed weaker domestic economic conditions to a lack of clarity in relation to Brexit, alongside a fresh injection of business uncertainty from the forthcoming general election," say IHS Markit.

Bringing the Services PMI and Manufacturing PMI together gives a Composite PMI, which gives a more holistic view of the economy. The Composite PMI read at 48.5, which is a 40-month low.

Composite PMI

"Today’s PMI numbers have moved the UK economy further into contraction territory. Brexit, trade wars and now added uncertainty from the snap election are taking their toll on businesses and consumers. The Labour manifesto, unveiled yesterday, will likely put more fear into UK-based businesses and the middle-class consumers, which could feed strongly into next month’s numbers, potentially putting BoE on alert to stimulate the economy," says Artur Baluszynski, Head of Research at Henderson Rowe, a boutique wealth management firm.

"As ever of late, it’s the political environment that is hurting us. Probably not a leave vs remain balance as such, but the fact that uncertainty prevails and now accentuated by the third general election in five years. Let us hope that one way or other the election result is decisive on December 12th. If not, we can expect more negativity as a consequence of continuing unwelcome uncertainty," says Andy Scott, CEO of REL Capital.

Does the data warn of a recession at any point in the future?

First of all, for a recession to be declared the UK must endure two consecutive quarters of negative growth. Data from the third quarter was positive, therefore the ecnomy must suffer contractions in the final quarter of 2019 and the first quarter of 2020. This means the next five PMIs must point in the direction of economic contraction.

However, Samuel Tombs, an economist with Pantheon Macroeconomics, cautions against being "too bearish" on the UK economy, noting that the PMIs have been poor at predicting official data outturns of late.

"Hold on bears: it's important to note that the PMIs for the UK have been a poor guide over the last four quarters, under-predicting the rate of q/q% growth by an average of 0.2pp. They are too sensitive to political/Brexit uncertainty and exclude key sectors (retail/gov't)," says Tombs. "Those concerns likely have only intensified since the general election campaign kicked off."

Tombs also notes that the services PMI excludes the retail and public sectors; growth in government spending has been rising this year.

"Given the potentially temporary nature of the decline in business confidence, the outlook for fiscal stimulus—whichever party wins the general election—and recent signs that the global economy is starting to recover, we still expect the MPC to hold back from cutting Bank Rate over the coming months," says Tombs.

 

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