The week ahead: PMIs signal weak start to 2025

27 January 2025

It’s far too early to have any official data on 2025 yet, but some important surveys are pointing to another bout of stagflation. Although the economy isn’t as bad as these surveys look at first glance, it does make things tricky for the Bank of England (BoE) as it tries to support the economy and bear down on inflation at the same time.

If you’ve never heard of the PMIs, I congratulate you because that probably means you have more exciting interests. However, for us economists, they are a big deal. In short, they are widely followed surveys of business leaders in the construction, manufacturing and services industries that ask whether metrics such as output, employment and prices have increased or decreased compared to last month. A score of 50 is considered neutral, meaning it’s not better or worse than last month, a score below 50 means that metric is lower compared to last month and vice versa.

They are amongst the first bits of data we get on the economy each month and are normally a pretty good indicator of how the economy is performing.

Currently, the PMIs are now flashing red in three key areas.

First, at just 50.9 the composite PMI, which combines the manufacturing and services sectors, is suggesting that the stagnation in the second half of last year carried through to January. Admittedly, things probably aren’t as bad as the composite PMI is pointing to. The PMI rose a little in January and it excludes the government sector, which should be benefiting from a huge increase in spending, and the construction sector, which has been stronger than other areas. But clearly the risks to our forecast that growth would start to pick up from Q1 are now skewed to the downside.

Second, the employment balance has been below 50 since October and fell sharply in December, suggesting that firms have reigned in hiring plans since the Autumn Budget. To put that into context it’s only slightly higher than the average of 2008-09 in the wake of the Global Financial Crisis. We had expected the unemployment rate to creep up this year as more people entered the workforce, but a hiring freeze across the economy raises the chances of the unemployment rising significantly faster.

Third, the input prices balance, which measures how quickly all the costs that firms are facing are rising has jumped. This is reportedly due to higher employment costs in firms themselves, but also in their supply chains and rising energy costs again. Indeed, wage growth jumped in the latest data. This combination of weak growth and rising inflation is a nightmare trade-off for the Monetary Policy Committee (MPC), which will want to cut interest rates to support the economy but also need to bear down on inflation.

This means the MPC will have to walk a pretty narrow path. An interest rate cut in February from 4.75% to 4.5% seems a pretty good bet after the weak start to the year, but the resurgence in inflation will make the committee nervous about cutting too quickly. We have one cut a quarter pencilled in this year as the MPC has indicated that it is growing more concerned about the outlook for growth than a tick up in inflation. But this will depend on how successful firms are in passing through in the increase in costs to their customers or whether the bulk of the impact falls on employees.

  • Mortgage approvals rate
  • House prices climb in January

Mortgage approvals rate

We expect mortgage approvals to come in at around 65,000 for December, roughly in line with the 10-year average. Over the last couple of months mortgage approvals have fallen due to affordability constraints with sub-4% fixed rate mortgages being withdrawn. This should signal rising house prices over the coming months. 

Households continue to be squeezed as repayments are still elevated. 2- and 5-year swap rates, which determines the pricing for most mortgage products, remain triple their 2021 level. 

1.2 million homeowners are expected to remortgage this year. Those moving onto a new 2 year fixed rate should expect slightly lower interest rates. 

However, those who have their current 5-year fixed-rate mortgages coming up for renewal will face a significant jump in monthly repayments.

House prices climb in January

House prices should climb again in January as the BoE’s November rate cut takes effect, Autumn Budget uncertainty fades and buyers try to finalise purchases before higher taxes come in April. 

Tax rises from the Budget means house prices will increase in Q1, before facing a potential downturn as higher taxes come into effect. 

Financial markets have driven up interest rates due to worries about tariffs and lower growth than expected. This means housing affordability will remain constrained for longer, potentially dampening future growth in house prices.  

Despite jittery financial markets we think the BoE will cut rates faster than markets expect, with at least 3 rate cuts this year.

 

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