Composite PMI: Growth slowing, not collapsing

Time to buckle up, because economic growth is in for a bumpy ride over the next year or so. The stabilisation in the S&P/CIPS Composite PMI at 53.1 suggests that the economy probably didn’t contract again in June, but it doesn’t imply much of an improvement either.

However, the PMI has not been a reliable indicator of movements in GDP over the last two years so it would be unwise to suggest that the economy has already stabilised. In fact, we expect a contraction of about 0.5% q/q in the second quarter, followed by a rebound in the third.

Growth is likely to be extremely erratic over the coming year, as big jumps in inflation and potential supply chain disruptions will have major impacts in Q2 and Q4. The big picture, though, is that the economy may be only fractionally larger this time next year than it was before the pandemic.

Future looks a bit less rosy

Even though the headline index stabilised, a more worrying picture emerges when we look at the data in more detail. The decline in both the new orders index (down from 53.8 to 50.8) and the future output index (down from 64.9 to 62.8) suggest that output will deteriorate over the next few months.

The services PMI stabilised at 53.4. The service economy got a boost from a sustained recovery in entertainment and sporting events and other areas of face-to face consumer spending, though the PMI indicates that growth is battling against the cost-of-living crisis and heightened economic uncertainty.

Admittedly, the input and output prices balances both fell, but they remain very close to their all-time highs – suggesting that inflation has much further to run. The PMI press release noted that, ‘survey respondents overwhelmingly cited higher wage bills, energy costs and fuel prices’. That points to high global commodity prices and a tight domestic labour market that are continuing to add to inflationary pressures. Indeed, we expect inflation to hit 10.5% in October, and that we’ll see only the start of a material fall in mid-2023.

Supply chains holding up for now

The output balance of the manufacturing PMI dropped from 54.6 in May to 53.4 in June, a sign that the manufacturing sector is not holding up as well as the services sector.

However, the input prices balance eased a little and the suppliers’ delivery time index inched up slightly, suggesting that the war in Ukraine and coronavirus-related shutdowns in China aren’t affecting supply chains yet.

But this is unlikely to be maintained over the rest of the year. As the impact of those situations in Ukraine and China start to filter through, you can expect to see increasing pressure on UK supply chains (again).

Reasons to think recession will be avoided

Despite the stabilisation in the output index, the employment balance did actually rise, which implies that firms are still hiring. The tight labour market, along with very strong household balance sheets and the likelihood of more government support, will actually support consumer spending. All key reasons why we still think the economy will narrowly avoid a recession this year.