PMI suggests economy can withstand rate hike

Economic growth was stable in November, going by the tick down in the IHS/Markit Composite PMI from 57.8 in October to 57.5. At the same time, the jump in the input prices balance from 79.8 to 81.9 suggests that cost pressures continued to rise in November. The steady PMI should be enough to convince the Monetary Policy Committee (MPC) that the economy can withstand a rate hike in December. 

Some members of the MPC are concerned that economic growth is slowing as we approach winter, but today’s PMI reading will embolden those hawks on the committee who are calling for an immediate tightening in policy. 

Growth remains robust 

As a reading above 50.0 suggests that the economy is growing, the small fall in the Composite PMI suggests that demand still continued to rise in November despite higher inflation. The overall rate of new order growth accelerated to a five-month high and service providers reported a faster recovery in new work than goods producers.

Of course, the PMI is just one indicator among many. Other unofficial surveys, such as the ONS’ Business Insights and Conditions survey, have suggested that the economy weakened in November. And the PMI’s suggested that labour and materials shortages are still weighing heavily on output. 

However, the combination of rising consumer confidence, a tightening labour market and rising consumer spending on leisure activities, it seems like economic growth may be a little stronger at the end of the year than many have assumed. 

No easing in cost pressures

Firms appear to be absorbing more of the recent surge in costs in their margins as the input prices balance jumped to 81.9, up almost two points to its highest level on record. But the output prices balance actually fell to 62.5 from 63.9. However, firms won’t be able to absorb this costs increase for long and will have to pass it on to consumers, which is one reason why we think inflation will continue to rise until it hits a peak of almost 5% in April 2022. 

Indeed, the input prices balance of the services PMI jumped from 78.0 to 80.3, which shows that it’s not just energy-intensive manufacturing firms that are experiencing rising costs. That said, at 90.3, the input prices balance of the manufacturing PMI points to higher cost pressures in that sector than elsewhere in the economy. 

Behind the data

The tick down in the composite PMI was driven by a fall in the services PMI from 59.1 in October to 58.6, but this was partially offset by an increase in the output balance of the manufacturing PMI from 50.6 to 52.9. Admittedly, the employment balance of the composite PMI fell from 57.7 to 56.0, but it remains well above the neutral level of 50, a sign that firms are still hiring and demand for labour remains strong, even as respondents are still reporting difficulties in finding candidates to fill vacancies. Labour shortages are likely to continue through to the second half of 2022, as employees will take time to retrain and move into areas where skills are in demand. 

Meanwhile, the supplier’s delivery balance of the manufacturing PMI rose to 20.7 from 17.1 in October. Remember that a lower balance indicates that firms are waiting longer to get supplies, so the supply situation improved in November. But it remains at its fifth lowest level on record, so there is no sign of supply shortages easing up yet. That will put a crimp on economic growth over the next six months. 

Overall, November’s PMI readings are another piece of evidence suggesting that the economy has not slowed as much as some had feared in the last quarter of the year. If the official GDP and employment data for October is as steady as the unofficial data we have had so far, the MPC looks set to hike rates at its meeting on 16 December. 


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