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'All-sector' PMI at 54.1 in August from 53.7 in July
Service sector offsets slowdowns in manufacturing and
construction
Faster order book growth boosts hiring, but confidence slumps
lower
Prices rise at slower rate despite higher wage costs
PMI survey data showing faster service sector growth in August
come as much-needed welcome news after disappointing manufacturing
and construction surveys.
The resulting robust and resilient rate of economic growth
signalled for the third quarter so far will no doubt draw some
sighs of relief at the Bank of England after the rate hike earlier
in the month.
However, the survey data highlight the extent to which the
economy has become more reliant on services to support growth, and
in particular an especially strong financial service sector.
Business expectations for the year ahead also sank markedly lower,
largely reflecting increased anxiety over Brexit negotiations.
Given the increasingly unbalanced nature of growth and the
darkening business mood, risks to the immediate outlook seem tilted
to the downside.
Third quarter set for 0.4% growth
The IHS Markit/CIPS 'all-sector' PMI Output Index rose to 54.1
from 53.7 in July as stronger service sector growth helped offset
slower rates of expansion in manufacturing and construction in
August, pointing to a slight acceleration in the overall pace of
economic growth.
Service sector business activity showed the second-largest
monthly expansion since February.
The improvement lifts the average all-sector PMI reading for the
third quarter so far to 53.9, down slightly from the second quarter
average of 54.1 but still indicative of robust economic growth of
just under 0.4%.
Drilling down within the service sector, the strongest upturn
continued to be recorded for financial services, which have seen
the best trend growth throughout the year to date, followed by
computing & IT and transport services.
Consumer-facing sectors such as hotels, restaurants and sporting
& leisure activity remained weak spots, though
business-to-business services growth was also once again also
relatively subdued.
The upturn in the service sector contrasted with signs of a
further slowdown in manufacturing. The factory sector reported the
weakest rise in output since March 2017.
The latest slowdown was driven to a large extent by the first
drop in export orders since 2016, blamed on a combination of weaker
global demand and Brexit-related concerns among foreign customers.
The steepest export decline was seen for producers of inputs to
other overseas manufacturers.
Building sector activity meanwhile slowed after July's
weather-related jump, though remained above the average seen in the
first half of the year.
Faster order book growth boosts hiring
New order inflows also regained some momentum, registering the
second-largest increase since February, though sector trends again
remained marked. A stronger rise in service sector new business
contrasted with the smallest inflow of manufacturing new orders for
25 months (stymied by falling exports) and a slowing in new
construction orders, albeit with the latter remaining relatively
buoyant by standards of the last year.
Employment across the three sectors combined meanwhile rose at
the fastest rate since February, driven by increased recruitment
activity in the service sector. Construction nonetheless recorded
the fastest rate of job creation of the three sectors for the third
straight month. On the other hand, manufacturing headcounts barely
rose, mainly reflecting the sector's slower order book growth.
Optimism hit by Brexit anxiety
The improved rate of growth of new orders did little to allay
worries about the outlook, with optimism about future business
activity dropping markedly in August to one of the lowest levels
seen since the 2016 EU referendum. Sentiment about the year ahead
slipped lower across the board, though remained highest in
manufacturing, in part linked to hopes that the weaker currency
could revive exports.
Slower rise in prices despite higher wage
costs
The August surveys brought mixed news on inflation. The
all-sector input cost index rose slightly in August from an
already-elevated level, indicating the second-highest rate of
increase so far this year. Although manufacturing and construction
cost inflation rates have eased since earlier in the year, service
sector costs have trended upwards, often reflecting higher wage
costs.
In contrast, average prices charged for goods and services rose
at the slowest rate for three months in August, suggesting firms
generally struggled to pass higher costs on to customers, even in
the faster-growing service sector.
Rates on hold for now
The resilient overall pace of growth signalled by the surveys,
as well as signs of higher wage costs amid a tightening labour
market, will help vindicate the Bank of England's decision to hike
interest rates at its 2nd August meeting.
The decision to hike, and in particular the unanimity of the
decision, nevertheless looks unusual given the relatively weak rate
of economic growth signalled by the PMI compared to rate hikes
before the global financial crisis (see chart) and clouds our view
of the monetary policy decision-making process. The rise in the
August services PMI could therefore strengthen arguments for rates
to be hiked further at some point in the near future. However, it
seems likely that the Monetary Policy Committee will await further
news on the health of the economy amid the intensifying Brexit
process in coming months before tightening policy again. The
implication is therefore that rates could rise sooner than March of
next year if clarity on the Brexit arrangements comes earlier,
however this seems an unlikely scenario.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Posted 05 September 2018 by Chris Williamson, Chief Business Economist, IHS Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
