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The UK economy sustained a modest pace of expansion in June
according to preliminary PMI survey data, and also saw steady
strong employment growth. However, the recovery is looking
increasingly uneven, and the outlook has deteriorated markedly.
Forward-looking indicators are hinting that growth is likely to
deteriorate sharply in the coming months. Meanwhile, price gauges
remain worryingly high to suggest that elevated rates of inflation
will persist for some time to come, albeit with some signs
appearing that the rate of increase could peak soon.
UK growth holds steady at modest pace
The S&P Global/CIPS UK composite PMI™ held steady at 53.1 in
June, according to the preliminary 'flash' reading based on about
85% of normal replies. The unchanged rate of growth is the lowest
since the COVID-19 lockdown of February 2021, underscoring the
downshifting in the rate of growth that has been evident since the
initial reopening of the economy from the restrictions imposed at
the turn of the year to deal with the Omicron wave. At the current
level, the PMI is broadly consistent with GDP rising at a modest
quarterly rate of 0.2-3%.
Hiring remains impressive
The survey data also showed employment continuing to rise at a
solid clip in June, often as firms sought to rebuild capacity lost
amid the pandemic due to shortages of labour. June's increase
extends an impressive run of jobs growth which has been evident
since March of last year.
Uneven recovery
Such impressive hiring and steady economic growth look unlikely
to last, however, in part due to the uneven nature of the
recovery.
Manufacturing output growth slowed in June to the weakest since
February 2021, down to a level which is historically consistent
with the goods producing sector contracting for a second successive
month, to thereby act as a drag on GDP. With stocks of finished
goods rising at the steepest rate for 32 months, firms may seek to
reduce production further in coming months unless demand
revives.
The service sector as a whole retained greater resilience than
manufacturing, but has likewise seen growth weaken sharply since
earlier in the year. While consumer spending continued to help
drive the service sector expansion, notably in terms of exports,
the hotels and restaurants sector has notably already seen its
recent growth spurt after the Omicron wave move into reverse amid
the cost-of-living crisis, with business activity and inflows of
new business falling steeply in June. Business services have also
seen growth almost come to a standstill in the past two months, and
financial services growth has likewise weakened considerably in the
second quarter.
Demand growth close to stalling
The data also hint that worse is yet to come, because the
current expansion is being supported by orders for goods and
services placed in prior months rather than new demand. Inflows of
new business rose only modestly in June; the rate of increase
having slowed markedly compared to May to register the weakest
monthly gain since February 2021.
New orders for manufactured goods fell slightly, dropping for
the first time in almost one and a half years, while new business
placed at service sector firms rose only slightly, registering the
slowest expansion in the past 16 months.
One area of divergence between the two sectors was overseas
trade. While exports of goods continued to fall in June, exports of
services rose at one of the fastest rates seen since the pandemic,
buoyed by looser travel restrictions.
Recession signals flash red
Other forward-looking indicators also point to worsening growth
in coming months. In addition to the dearth of new orders, business
expectations regarding output in the coming year fell to a degree
exceeded only twice in the past decade of survey history. Only the
start of the pandemic and the 2016 EU referendum saw bigger falls
in sentiment. The latest decline takes business confidence to the
lowest since May 2020.
Business prospects darkened amid reports of growing concerns
over the cost-of-living crisis, and notably soaring energy costs,
as well as higher interest rates, Brexit and slower economic growth
both at home and abroad.
Both the new orders and future business expectations survey
gauges are now down to levels which have in the past typically
heralded an economic contraction, with the future expectations
index looking especially low, signalling a heightened risk of
imminent recession.
Input costs hint at peaking of inflation
The survey's inflation gauges meanwhile remained elevated to
indicate that the cost-of-living crisis is set to persist for some
time to come. However, the survey's input cost gauge fell from the
all-time high registered in May to at least hint at a possible
peaking in the rate of inflation. Inflationary pressures eased most
noticeably in the manufacturing sector, assisted by a further
reduction in the number of supply chain delays reported compared to
prior months. Suppliers' delivery times - a key gauge of
inflationary pressures in the manufacturing sector - lengthened to
the smallest extent since October 2020. That said, it should be
noted that consumer price inflation lags the PMI input cost index
by several months, so CPI still looks set to rise above its current
level of 9.1% before starting to fall later in the year.
Outlook
June's survey data suggest that the economy is starting to look
like it is running on empty. Current business growth is being
supported by orders placed in prior months as companies report a
near-stalling of demand. Manufacturers in particular are struggling
with falling orders, especially for exports, and the service sector
is already seeing signs of the recent growth spurt from pent-up
pandemic demand move into reverse amid the rising cost of
living.
Business confidence has now slumped to a level which has in the
past typically signalled an imminent recession. The weakness of the
broad flow of economic data so far in the second quarter points to
a drop in GDP which the forward-looking PMI numbers suggest will
gather momentum in the third quarter.
While there are some signs that inflation could soon peak, the
survey data suggest the rate of inflation will meanwhile remain
historically high for some time to come, indicating that the UK
looks set for a troubling combination of recession and elevated
inflation as we move into the second half of the year.
Chris Williamson, Chief Business Economist, S&P
Global Market Intelligence
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.
