The softening in the all-sector PMI in November suggests that GDP growth has slowed sharply in Q4 from Q3’s 0.3% q/q rise and has perhaps even turned negative. But we think that the PMIs are overstating the gloom. Even so, it is clear that the risks to our forecast of a 0.2% q/q rise in GDP in Q4 lie on the downside.
PMIs suggest economy struggling to grow at all
- The softening in the all-sector PMI in November suggests that GDP growth has slowed sharply in Q4 from Q3’s 0.3% q/q rise and has perhaps even turned negative. But we think that the PMIs are overstating the gloom. Even so, it is clear that the risks to our forecast of a 0.2% q/q rise in GDP in Q4 lie on the downside.
- While the final services PMI was revised up to 49.3 in November (the flash reading was 48.6), it remained below October’s reading of 50.0. At this level, the index suggests that the services sector has done no better than flatline in November, compared with Q3’s 0.4% q/q rise in services output. Meanwhile, the new orders balance fell even more sharply, signalling that growth might not pick up much in the coming months.
- What’s more, the survey revealed an uncomfortable mix for the MPC of slowing growth but rising near-term price pressures, with the prices charged balance rising sharply from 51.4 to a four-month high of 52.1. That said, with the input price index dropping to its lowest level in just over three years, easing cost pressures should feed through to output prices in time.
- And the survey did at least contain some positive elements. The future activity balance picked up from 61.6 in October to a four-month high of 62.9 in November. Moreover, the rise in the employment balance from 48.8 to 50.1 indicates that firms remain confident enough in the outlook for demand to keep their headcounts steady.
- Taken together with the construction and manufacturing surveys released earlier this week, the all-sector PMI fell from 49.5 to 48.9. At face value, that’s consistent with a 0.2% q/q contraction in GDP in Q4. (See Chart 1.) But the PMIs have under-estimated quarterly GDP growth by an average of 0.2ppts over the past four quarters, partly due to higher government spending being excluded from the survey. And the rise in government spending in October’s public finances figures may mean that this is repeated in Q4. But at the very least, the surveys suggest that underlying growth is very weak and that the risks to our forecast of +0.2% q/q rise in GDP in Q4 lie on the downside.
- All in all, the weak tone of this survey is likely to give more ammunition to the doves on the MPC who think interest rates need to be cut. But if there is a clear election victory and a Brexit deal by 31st January – and as long as the economic data doesn’t weaken significantly – we suspect that the Bank will keep rates on hold at 0.75% in December and January.
Chart 1: IHS Markit/CIPS All-Sector PMI & GDP
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org