The small rise in the all-sector PMI in February suggests that Q1 was shaping up to be a good quarter for the economy. But we suspect the survey will take a turn for the worse in March as the economic fallout from coronavirus starts to be felt.
Q1 was shaping up nicely until coronavirus got involved
- The small rise in the all-sector PMI in February suggests that Q1 was shaping up to be a good quarter for the economy. But we suspect the survey will take a turn for the worse in March as the economic fallout from coronavirus starts to be felt.
- The increase in the all-sector PMI from 52.8 to 53.0 left it consistent with quarterly GDP growth of 0.4%. (See Chart 1.) Indeed, all sectors of the economy appeared to be doing fairly well in February. The manufacturing output balance rose from 50.1 to 52.2 and the construction activity index rose from 48.4 to 52.6. The only slightly softer area was the services sector, where the activity balance fell from 53.9 to 52.8.
- Despite numerous reports from service sector firms “citing a negative impact on sales from the coronavirus outbreak, particularly to clients in overseas markets” the future activity balance rose to its highest level in over four years. And it was encouraging that the composite PMI flash estimate of 53.3 (responses received between 12th and 19th February) was only revised down marginally to 53.0 (including later responses received between 19th and 27th February).
- However, the number of coronavirus cases in Europe has risen from 481 since the survey closed to around 3,370 now. The sharp fall in equity prices suggests that real-economy sentiment will take a turn for the worse in March. And the services sector, where activity often incorporates face-to-face interactions and gatherings of large numbers of people, is probably most at risk from a widespread outbreak in the UK.
- There was one sign of a coronavirus effect in the survey. The suppliers’ delivery times balance of the manufacturing PMI fell from 49.4 in January to 41.4 in February indicating a lengthening in lead times, presumably due to firms starting to have some difficulty in sourcing parts from China.
- The shock to global demand emanating from China and a likely hit to domestic consumption based on our assumption that the number of cases in the UK rises into somewhere in the hundreds or thousands means we now expect quarterly GDP growth to slow from 0.2% in Q1 to 0.0% in Q2 (previously 0.4%). We suspect that the MPC will cut interest rates from 0.75% to 0.50% at the meeting on 26th March if not before. (See here.) It will be interesting to hear the take of future BoE Governor Andrew Bailey when he testifies to the Treasury Select Committee at 2.15pm today.
Chart 1: IHS Markit/CIPS All-Sector PMI & GDP
Sources: IHS Markit, Refinitiv
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com