The recovery in the services PMI in October will allay fears that the largest sector of the economy is slipping into recession. Nonetheless, the survey suggests that the risks to our forecast that GDP growth will slow to +0.2% q/q in Q4 are to the downside.
PMIs recover, but from a very low level
- The recovery in the services PMI in October will allay fears that the largest sector of the economy is slipping into recession. Nonetheless, the survey suggests that the risks to our forecast that GDP growth will slow to +0.2% q/q in Q4 are to the downside.
- The recovery in the headline services PMI from 49.5 to 50.0 was larger than the consensus forecast of a rise to 49.7 and left it only just short of its 50.3 average in the year to date. Of course, a reading of 50 is nothing to shout about seeing as historically it is consistent with services output stagnating.
- However, growth in the services sector has been stronger than the survey has suggested throughout the last 12 months. That’s partly due to government consumption and the retail sector, which aren’t covered by the survey, holding up much better. The increase in the BRC’s measure of retail sales growth in October, released overnight, points to the resilience in the latter continuing. And government spending will get a further boost from April 2020 when the 2019 Spending Round is implemented.
- The other balances sent a positive message too. While new orders edged down a touch, from 49.3 to 49.0, the employment balance rose from 48.0 to 48.8, the backlogs of work balance increased from 47.1 to 47.5 and the future activity rose from 59.5 to 61.6. The latter hit a three-month high.
- Alongside rises in the construction and manufacturing PMIs, the increase in the services PMI pushed up the all sector index, but only from 48.8 to 49.5, consistent with GDP growth of around minus 0.1% q/q at the start of Q4. (See Chart 1.) Note, however, that like the services PMI, the all sector PMI has been unreliable recently. It has been consistent with the economy stagnating in the year-to-date, whereas 3m/3m growth has averaged 0.25%.
- Notwithstanding that, the PMIs suggest there is a downside risk to our forecast that GDP growth will only slow to +0.2% q/q following a likely +0.4% q/q expansion in Q3 (Q3 data released 11th November). The big picture is that there is little momentum in the economy. The Monetary Policy Committee will sit on its hands this Thursday, but unless the drag of Brexit uncertainty can be removed in the next few months, we expect interest rates to be cut – perhaps by 25bps in the May 2020.
Chart 1: IHS Markit/CIPS All-Sector PMI & GDP
Sources: IHS Markit, Refinitiv
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com