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All sector PMI signals second-steepest fall in output since
2009 and drop in GDP in Q2
Selling price inflation at joint three-year low
Jobs gain points to record drop in productivity
The PMI surveys indicated that the UK economy slipped into
contraction in June, registering the second-steepest fall in output
since the height of the global financial crisis in 2009. Although
employment continued to rise, the resulting decline in productivity
signalled was the largest in the survey's history.
Economy slides into decline
The IHS Markit/CIPS 'all-sector' PMI fell from 50.7 in May to
49.2, dropping below the no-change level of 50 for the first time
since July 2016. With the exception of the brief decline seen in
the immediate aftermath of the 2016 referendum, the latest fall in
output was the steepest since April 2009. The June reading alone is
indicative of the economy contracting at a quarterly rate of 0.2%,
and rounds of a second quarter for which the survey points to a
0.1% contraction of GDP.
Output fell in both manufacturing and construction, and rose
only marginally in services. While the drop in factory output was
the quickest since October 2012, the decline in construction was
even sharper and the steepest since April 2009. The near-stalling
of service sector output was meanwhile one of the worst
performances seen over the past decade. Within services, falling
activity was reported in financial services, transport and
communication and personal consumer services.
This time it's different
Importantly, the latest downturn differs from that seen in 2016
as it has followed a gradual weakening in the rate of economic
growth rather than being a sudden and brief collapse in output
after the 'shock' referendum result. The pace of growth has eased
markedly since peaking a year ago, resulting in a steady
deterioration in demand so far this year. Measured across the three
sectors, inflows of new business fell in June for the fifth time so
far this year, with the rate of decline gaining momentum to reach
the second-steepest since April 2009.
New orders fell in all three sectors, with construction
registering the sharpest downturn followed by manufacturing, while
services saw a marginal decline.
The lack of new work meant companies again ate into previously
placed orders to sustain business activity. Measured across the
second quarter, backlogs of work consequently fell to an extent not
seen since 2012.
Selling prices rise at slower rate despite sharply
rising costs
Average prices charged for goods and services meanwhile rose at
the joint-weakest rate since July 2016 as firms increasingly sought
to boost sales by competing on price. In contrast, average input
costs rose sharply again, exerting downward pressure on profit
margins, in part due to higher import costs arising from the
depreciation of sterling, higher fuel prices and the recent rise in
the minimum wage.
Labour market bright spot blighted by record drop in
productivity
The main piece of good news from the survey related to
employment, with jobs growth ticking higher during June to signal
the largest rise in employee numbers since last September. However,
only the service sector reported an increase in payroll numbers,
with weak demand and cost cutting leading to job cuts in both
manufacturing and construction.
Moreover, the unusual boost to hiring at a time of falling
output also indicates the sharpest deterioration of labour
productivity recorded over more than 20 years of survey data.
Rate cut signal
The additional hiring is unusual given the downturn in order
books, especially as businesses also grew less optimistic about the
outlook (albeit less gloomy than earlier in the year), but
nevertheless provides a ray of hope that the current downturn may
prove transitory. Indeed, in manufacturing, at least some of the
recent downturn has reflected an inventory adjustment after record
levels of Brexit-related stock building seen earlier in the
year.
However, the overall degree of business sentiment about the year
ahead remains worryingly subdued, characterised by uncertainty over
the potential disruption of Brexit, signs of weakening sales growth
and a lowering of economic growth projections, suggesting risks
remain skewed to the downside.
The June decline also pushes the PMI's headline index further
into territory historically consistent with a bias towards looser
monetary policy from the Bank of England, to the extent that for
policymakers to not cut interest rates with the PMI at this level
would be unprecedented in the survey's two-decade history.
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.
