While the manufacturing PMI recovered in October from September’s extremely weak level, it is still consistent with a recession in the manufacturing sector.
Consistent with manufacturing recession
- While the manufacturing PMI recovered in October from September’s extremely weak level, it is still consistent with a recession in the manufacturing sector.
- The PMI reading of 49.6 (up from 48.3 in September) exceeded the consensus forecast of 48.1 and left the balance well above its Q3 average of 47.9. Admittedly, the sub-indices showed that some of the rise in the PMI was driven by a pick-up in the stocks of purchases balance from 53.6 to 55.6, presumably driven by firms stockpiling in case of a no deal Brexit on 31st October.
- But the rise in the stocks of purchases index accounted for just 0.2 points of the total 1.3 point rise in the PMI. And there were improvements across the whole range of balances. Particularly encouraging was the sharp increase in the output balance from 47.9 to 49.7, which accounted for about half of the pick-up in the headline balance. The improvement in the new orders balance, from 46.4 to 47.7, provided another glimmer of hope that the worst may be over for the industrial sector.
- Meanwhile, there were few signs of rising inflationary pressures. The output prices balance picked up marginally. But at 51.7, it is still below Q3’s average of 52.2. And the fall in the input prices balance from 51.3 to 50.0 – to its lowest since March 2016 – suggests a further easing in manufacturers’ cost pressures is in prospect.
- Against the backdrop of election and Brexit uncertainty, the improvement in the PMI is clearly good news. However, the big picture is that the manufacturing sector is still struggling. Indeed, although the PMI recovered from September’s extremely weak level, it remains below the 52.0 mark that has typically separated expansion from contraction. And the PMI is, on the basis of past form, still pointing to fairly steep falls in manufacturing output of around 0.7% q/q at the start of Q4. (See Chart 1.)
- What’s more, faced with weakening demand, the subdued employment balance suggests that manufacturers are cutting their workforces.
- Overall, it seems likely that the manufacturing sector has remained a drag on GDP growth at the start of the fourth quarter. And with the other sectors showing little growth, we are expecting the economy to expand by no more than 0.2%-0.3% q/q in the next few quarters. Admittedly, the MPC still looks set to stand pat at its meeting next Thursday. (See here.) But if Brexit is delayed again beyond 31st January, and the economy remains weak as we expect, then we still think that the Bank of England will cut rates – perhaps by 25bp in May 2020.
Chart 1: IHS Markit/CIPS Manufacturing PMI & Manufacturing Output
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org