Manufacturing and services PMI released in the UK this week indicate the British economy continues to expand at a moderate pace, easing concerns of a sharper slowdown or a recession as the Brexit uncertainty bites on growth. However, when put against the backdrop of a weaker sterling and accelerating growth elsewhere in the world, notably the Eurozone, recent UK economic data leaves much to be desired.
Data out on Monday showed the IHS Markit/CIPS manufacturing PMI eased to 55.9 in September from a downwardly revised 56.7 in August. Forecasts were for a smaller decline to 56.4. Although the figure remains comfortably above the 50 mark which separates expansion from contraction, it points to a loss of momentum. In contrast, the Eurozone’s manufacturing PMI rose to a 6½-year high of 58.1 during the same period. However, there were a number of positives in the PMI report, such as solid growth in output, new orders and exports.
The services PMI released today surprised to the upside, coming in at 53.6 in September, beating expectations that it would stay unchanged at 53.2. While the positive figure provided an immediate boost to the pound, which jumped to $1.3285 in forex markets after the data, from a session low of $1.3242, it does little to change the near-term outlook for the UK economy. The index has averaged 53.5 in the past three months compared to 54.3 in the second quarter, suggesting growth failed to pick up in the third quarter. Today’s report also highlighted that new business growth was at its lowest in 13 months, while input costs continued to rise, putting pressure on operating expenses.
Construction was the worst performing sector among the three gauged by IHS Markit, with the PMI missing expectations of 51.0 to drop to 48.1 in September from the prior 51.1, according to yesterday’s data. This was the first drop in construction activity in 13 months and the lowest reading since July 2016. Uncertainty over Brexit was blamed for the sharp drop in civil engineering work, which fell at its steepest pace since April 2013. New business orders were also down, with house building being the only bright spot.
The UK’s combined composite PMI fell to a seven-month low of 53.6 in September, underscoring the sluggishness in the economy and raising doubts about the Bank of England’s well signalled plans to raise rates in November. While it could be argued that the British economy’s resilience is impressive given the strong headwinds being generated by Brexit, the loss of potential output is also significant, which is perhaps best accentuated by the performance of the Eurozone economy.
IHS Markit’s composite PMI for the Eurozone rose to a four-month high of 56.7 in September, driven by strong growth in Germany, Ireland, France and Spain. The euro fell to 0.8850 pounds after today’s strong UK services PMI, reversing the small gains made a short while earlier from the release of the Eurozone PMIs. However, despite having retreated by about 4.7% from August’s 10-month highs due to sterling’s BoE-led rally, the euro remains up 4% in the year to date against the British currency on the back of the diverging outlook for the two economies.
