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'All-sector' PMI at 50.3 in January, second-lowest since
December 2012
New orders deteriorate amid rising Brexit worries
Headcounts fall for first time since July 2016
Selling price inflation at eight-month low
The latest PMI surveys indicate that the UK economy stalled at
the start of the year as intensifying Brexit worries led to an
increasingly broad-based malaise. The survey results indicate that
companies have become increasingly risk averse and eager to reduce
overheads in the face of weakened customer demand and rising
political uncertainty.
Such a subdued start to the year, combined with worrying signs
of global economic weakness, suggest economic forecasts for growth
in 2019 are likely to be revised lower.
Economy stalls
Service sector growth ground almost to a halt in January,
matching similar disappointing news in the manufacturing and
construction sectors. The triple-whammy of weaker surveys pushed
the IHS Markit/CIPS 'all-sector' PMI down to 50.3 in January from
51.5 in December. The latest reading is the lowest since December
2012 with the sole exception of July 2016, when the economy
stumbled momentarily after the Brexit vote.
The further deterioration in January from already subdued growth
at the end of last year means the past three months have seen the
economy slip into its weakest spell for six years. Comparisons of
the PMI with official data indicate that GDP likely stagnated at
the start of 2019 after eking out modest growth of just 0.1% in the
fourth quarter.
Other survey indicators added to the gloomier picture. Inflows
of new business likewise fell for only the second time since 2012,
July 2016 having seen the only other decline in the past six
years.
Backlogs of work also declined as a consequence of the reduced
influx of new work, down for a fourth successive month and
deteriorating at one of the steepest rates since 2012.
Firms responded to the worsening order book situation by cutting
headcounts in January for the first time since July 2016. Although
modest, the drop in payroll numbers was the steepest since November
2012.
Broad-based malaise
Service sector growth was notably weak. Activity rose by the
smallest of margins in January as the index slipped to a
two-and-a-half year low of 50.1. With the exception of July 2016,
service providers suffered the quickest drop in new business since
April 2009. Manufacturing output meanwhile likewise rose at the
weakest rate since the EU referendum and construction output grew
at its slowest pace since the snow-related disruptions of
early-2018. Both sectors also saw growth of new work
deteriorate.
Looking at the impact on GDP, at current levels the PMI output
indices are indicative of the comparable official growth rates for
manufacturing and construction slipping into contraction while the
service sector stagnated, based on quarterly rates of change.
Brexit worries
Business sentiment about prospects for the year ahead meanwhile
held steady, though December's reading had been the third-lowest
since comparable data were first available in 2012 (measured across
all three sectors). Only November 2018 and July 2016 saw darker
business moods. Business confidence is currently running at levels
that have historically presaged an economic downturn.
The survey results indicate that companies have become
increasingly risk averse and eager to reduce overheads in the face
of weakened customer demand and rising political uncertainty. Such
worries were in turn most commonly linked to heightened Brexit
anxiety, though wider global political and economic factors were
also reported to have taken their toll on demand, especially fears
of a European economic slowdown.
Record stock-building
The surveys also recorded heightened activity in preparation for
a possible disruptive Brexit. Manufacturers reported the largest
rise in stocks of inputs in the 27-year history of the survey as
firms safeguarded against potential supply chain delays.
Some evidence was also seen in the construction and service
sectors as companies reported the need to complete projects or
source materials ahead of the UK's departure from the EU.
Prices rise at slowest rate for 8 months
Input prices meanwhile rose at a rate unchanged on December's
eight-month low, albeit still continuing to rise at a solid rate.
Companies often reported higher costs to have emanated from the
weak pound as well as higher wages, albeit with lower oil prices
helping to alleviate some of these upward pressures. The rate of
increase of average selling prices for goods and services meanwhile
fell to the lowest since last May, easing as companies often
struggled to pass higher costs on to customers.
Forecasts to be revised lower
With the surveys indicating a stalling of the economy in
January, and forward-looking indicators such as new orders
continuing to deteriorate, there is a heightened risk of the
economy stagnating or even contracting in the first quarter,
especially if Brexit uncertainty intensifies in the lead-up to 29th
March.
Such a subdued start to the year casts doubt on the ability of
the economy to expand in 2019 by the 1.5% indicated by current consensus forecasts, the
achievement of which would require a strong surge in the economy in
future quarters. Given the increasingly sombre-looking assessment
of the global economy, which surveys reveal to be expanding at the
slowest rate of over two years at the end of 2018, such a growth
spurt may prove difficult to achieve even in the event of a smooth
Brexit.
The decline in January also takes the headline PMI deeper into
territory that would normally have triggered a cut in interest
rates or other stimulus from the Bank of England, suggesting that
policymakers are likely to recognise increased downside risks to
the economy during the February policy meeting.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
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.
