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United Kingdom PMI January 2018

United Kingdom: Services and manufacturing PMIs edge down in January

Growth in the UK services sector decelerated in January, with the IHS Markit/CIPS UK services Purchasing Managers’ Index (PMI) decreasing from 54.2 in December to 53.0 in January, marking the lowest reading since September 2016. Despite the slowdown, the indicator remains comfortably above the 50-point threshold that separates expansion from contraction in activity in the services sector, where it has now been for 18 consecutive months.

January’s figure was driven by a slower pace of new orders growth compared to the average trend in 2017, partly reflecting the uncertainty surrounding Brexit. Nonetheless, backlogs of work increased due to ongoing new business activity, while the rate of hiring sped up to a four-month high in January on the back of new branch openings and planned new projects. On the price front, input price inflation continued to rise robustly, albeit recording the softest increase since September 2016. In a bid to maintain profit margins, firms passed higher costs to consumers, but due to a competitive environment, the increase in selling prices was the lowest in four months.

Despite the slowdown in service-sector growth, firms’ expectations grew more upbeat, as noted by Duncan Brock, Director of Customer Relationships at the CIPS:

“There was a significant rise in business expectations to the highest for almost a year. Some firms were also discounting to remain competitive and launching new products, which is a strong indicator that businesses expect consumers to start spending again.”

In parallel to the evolution of the services sector, manufacturing output growth slowed in January, with the IHS Markit/CIPS manufacturing PMI decreasing from 56.2 in December to 55.3 in January. However, the index remains well above the 50-point threshold that separates expansion from contraction in activity in the manufacturing sector, where it has been since August 2016.

January’s slight decline was driven by slower growth in production and new orders, which eased to six- and seven-month lows, respectively. However, new export orders grew robustly, aided by stronger demand from North America, China and Europe, among other regions. On the price front, input prices rose sharply in January due to higher supplier charges and raw material prices, which led some firms to engage in forward buying to mitigate future price hikes and delays in supplier deliveries. As a result, output prices increased as firms looked to pass on their higher costs to consumers, with selling prices rising at the fastest pace since April 2017.

According to Brock:

“Job creation remained strong, as optimism rose to its highest level for two years, even though orders from the domestic market were overshadowed by one of the biggest spikes in export orders in four years. Along with the strength of the global economy and investment by the sector in marketing and product launches, this is setting manufacturing up for a successful year ahead.”

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