Composite PMI: Buoyant PMI suggests any recession will be mild

21 February 2023

The surprise rise in the S&P/CIPS Composite PMI to 53.0 (a reading above 50 means activity is growing), the highest since the middle of last year, suggests the anticipated recession will be mild. Indeed, it’s touch-and-go as to whether the UK falls into a recession at all. 

However, we are yet to see most of the impact of the huge rise in interest rates over the last year and the PMI hasn’t been the most reliable guide to movements in the economy since the pandemic. For what its worth, we still think the UK economy will fall into a mild recession in the first half of this year, before growth resumes in Q3. 

Even if the UK does avoid a technical recession of two consecutive quarters of negative GDP growth, we will still enter a ‘slowcession’, where growth essentially flatlines. It will probably be the end of 2024 before the UK economy is back to its pre-pandemic size, representing four years of stagnation. 

Today’s data will support the hawks (economic policy advisors preferring policies that involve higher interest rates) on the Monetary Policy Committee (MPC) who say that interest rates need to rise a bit further to dampen demand and especially to prompt some easing in the labour market. The rise in the composite employment index to 51.9 will be concerning to the MPC as it implies firms aren’t yet shedding labour. 

The flash composite PMI rose to 53 in February, from 48.5 in January. That mostly reflected a sharp increase in the services PMI to 53.3, from 48.7. According to S&P Global, demand improved on the back of a brighter global economic outlook and lower domestic political uncertainty. The manufacturing survey also rose, although by less, to 49.2 from 47. Businesses reported higher client demand and a further easing in supply bottlenecks.

There was mixed news on inflationary pressures. Pipeline price pressures eased further, with the input prices index falling to its lowest level since spring 2021. However, the composite output prices index rose to a five-month high of 62.6 in February, from 61.9 in January.

Inflation is likely to fall sharply this year as energy and goods prices fall. However, services inflation, which is more influenced by the domestic economy and wage growth, will fall much more slowly. 

Interest rate peak in view

Today’s reading makes it a little more likely that the MPC goes for another 25 basis points at its next meeting in March. The labour market isn’t cooling fast enough amid a resilient economy for the MPC to be confident it has won the inflation battle just yet. However, that will probably be the peak. There is mounting evidence that inflation is falling sustainably and the MPC will want to see how the economy reacts to the huge rise in interest rates that have already occurred. 

Overall, February’s PMI points to continued resilience in the economy despite the sharp squeeze in real incomes and the rapid increase in interest rates. That means that it’s touch and go whether the UK slips into a technical recession this year or not.