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The flash PMI data show the UK economy being hit once again by
COVID-19, with growth slowing sharply at the end of the year led by
a steep drop in spending on services by households. Some brighter
news came through from manufacturing, where an easing of supply
chain delays helped lift production growth, but more importantly
also helped take some upward pressure off prices to hint at a
peaking of inflation.
With COVID-19 infections set to rise further in coming weeks due
to the spread of the Omicron variant, and more restrictions being
introduced, the pace of economic growth looks likely to continue to
weaken as we head into 2022. The bigger uncertainty will be on how
rising global infection rates might cause further supply and labour
shortages, and whether this means the easing of inflationary
pressures seen in December proves frustratingly short-lived.
Omicron hits the service sector
The UK economy is ending 2021 on a disappointing note, with the
pace of growth slowing sharply in December as COVID-19 worries once
again disrupt business activity. The IHS Markit/CIPS composite PMI
output index, covering both services and manufacturing, fell from
57.6 in November to 53.2 in December, according to the early
'flash' reading, indicating the slowest rate of expansion since the
lockdowns at the start of the year.
The slowdown reflected a sharp weakening of service sector
growth to the slowest in ten months, attributed primarily to rising
COVID-19 case numbers and growing concerns over the Omicron
variant. Health worries and new restrictions were often reported to
have deterred spending, both by businesses and households, causing
service sector new business to expand at the slowest pace since the
recovery began in March. Growth of new orders was dragged lower in
particular by a renewed slump in exports of services, which
suffered the steepest fall since February amid reports of a drop in
travel due to the new virus wave.
Activity fell sharply in the hotels, restaurants, travel and
transport sectors, and ground to a halt in other consumer-facing
businesses. However, business-to-business services also reported a
near-stalling of growth in December, recording the worst
performance since March to signal a broader slowdown beyond the
consumer sector.
Manufacturing growth meanwhile also remained subdued,
constrained by widespread component shortages and a fourth
consecutive monthly fall in export orders. Although the rate of
factory output growth picked up marginally in December to the
highest since August, aided in part by some signs of near-record
supply chain delays starting to ease, it should be noted that the
survey's output index is broadly consistent with stalled production
as measured by official data.
The slowing pace of service sector growth and subdued
manufacturing performance at the tail end of the year suggests the
pace of economic growth will have slowed in the fourth quarter
compared to the 1.3% quarterly expansion seen in the three months
to September.
Diverging outlooks
Service sector prospects for the year ahead meanwhile slipped to
the darkest since October 2020 due to the growing virus worries,
though signs of improving supply helped lift business expectations
in the manufacturing sector to the highest since May. While
suppliers' delivery times continued to lengthen at a rate far in
excess of anything seen prior to the pandemic, the incidence of
delays was the lowest so far this year.
Price growth cools from record pace, inflation peak in
sight
Inflationary pressures meanwhile cooled during the month, albeit
remaining elevated, attributable to the combination of the easing
supply situation and weaker demand growth. Nevertheless, although
down from November's record rate, the overall rate of input cost
inflation measured in December was still the third highest in more
than two-decades of survey history, with average prices charged for
goods and services also rising at a rate unprecedented prior to
September.
Hence, while inflationary pressures may have moderated in
December, the rate at which both costs and prices are rising
remains consistent with persistent strong inflation, albeit with a
peak having been tentatively signalled.
The latest official data show consumer price inflation rising to
5.1%, a breaching of the 5% level that the PMI data had signalled
ahead back in October. The latest PMI data are merely indicative of
the headline inflation rate falling to just under 5%.
Policy on pause at the Bank of England
The flash PMI data will add to calls for the Bank of England to
step away from hiking interest rates until the path of the Omicron
variant and the ensuing impact on the economy are clearer. Already,
the pace of growth signalled by the flash PMI's output index has
fallen into territory which would be usually associated with a
looser policy bias.
With the Omicron variant widely projected to cause a further
sharp rise in the infection rate as we head into the New Year, and
new social distancing restrictions already in place, the risk is
tilted towards the pace of UK economic growth slowing further in
the opening months of 2022.
As for inflation, there will be several factors to watch in
order to assess whether price pressures will continue to
moderate.
First, any switch of spending away from services to goods as
social distancing limits hospitality activity could drive up demand
for goods and push prices higher again.
Second, global supply chains could suffer another shock, as most
recently witnessed when the Delta wave hit factories in Asia,
causing production and exports of components to fall sharply.
Third, if the spread of the virus drives down labour market
participation, wage growth could rise.
While higher vaccination rates mean the impact of any Omicron
wave on the global economy is likely to prove less severe than
prior waves, there remain many unknowns about the efficacy of
vaccines and the severity of the variant, meaning the risks are
clearly skewed towards slower growth and stickier inflation.
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.
