PMI suggests economy largely shrugged off omicron

The economy looks like it may have suffered a little from omicron in December and January, but a strong rise in the IHS/Markit Composite PMI from 55.3 in January to 60.2 in February suggests that it may be on the mend. We expect all of the output lost in December and January to be made up in February as the number of people self-isolating drops, workers return to offices and consumers get back to socialising in person.

The Monetary Policy Committee (MPC) has made it clear that it is more focused on the threat from inflation than the risks to economic growth. The healthy February PMI reading makes it even more likely that the committee will raise interest rates from 0.5% to 0.75% at its next meeting in March, and elevates the risk of a 0.5% jump, although we think 0.25% is more likely.

Omicron just a blip

Unsurprisingly, the rise in February’s composite PMI was entirely driven by a jump in the services PMI from 54.1 to 60.8 as a lower number of coronavirus cases encouraged people to return to leisure venues.

Encouragingly, the rebound looks to be broad-based as almost all the sub-sectors in the services PMI rose. The employment index actually rose from 55.4 to 57.6 and the future activity index bumped from 75.4 to 76.9, suggesting that firms are pretty confident about the outlook for the growth over the next few months.

What’s more, new exports orders rose to 54.0, the highest level since mid-2018. As the UK’s major trading partners also reopen their economies, demand for exports should continue to rise.

The input prices balance of the services PMI rose from 79.8 to 81.7, indicating that cost pressures are still rising in the services industry. Inflation should stay around 5.5% until April, when it will peak at about 7.5%. It will drop back over the rest of 2022, but could still be around 4% at the end of the year, before dropping sharply in early 2023.

Manufacturing supply chains continue to improve

Even though the manufacturing PMI was flat at 57.3, there were still some encouraging signs. For example, the output index, which has a better relationship with the official data than the headline

index, rose from 53.8 to 56.7.

It was also encouraging to see a further recovery in the suppliers’ delivery time index, which rose from 30.6 to 31.9. Remember that a lower balance indicates that firms are waiting longer to get supplies, so the supply situation in the manufacturing industry improved again in February. Admittedly, the input prices index ticked up from 82.3 to 82.5. But the output prices balance dipped from 69.7 to 69.1, suggesting that firms aren’t passing on the rise in costs to their customers at the same rate they were previously.

Overall, the PMI readings suggest GDP was flat in January. However, growth should rebound strongly in February, and we’re still forecasting that GDP will grow by almost 4.5% in 2022.