United Kingdom: Services PMI ticks up in December, while manufacturing PMI declines
January 4, 2018
The IHS Markit/CIPS UK services Purchasing Managers’ Index (PMI) increased from 53.8 in November to 54.2 in December. As a result, the indicator remained comfortably above the 50-point threshold that separates expansion from contraction in the services sector, where it has now been for 17 consecutive months.
December’s figure was driven by a sharper rise in business activity compared to the prior month. However, growth in new orders softened, which led to a consequent slowdown in the rate of hiring. More sluggish new order growth also lessened the pressure on operating capacity, as backlogs of work fell. On the price side, input price inflation reached the highest level in over a year, with firms reporting higher prices for fuel, utilities, food and salaries. As a result, firms passed on higher prices to consumers in a bid to protect margins. Despite the uptick in the overall index, Chris Williamson, Chief Business Economist at IHS Markit urged caution:
“As has been increasingly the case in recent months, the good news comes with a health warning about the sustainability of the upturn. Digging into the details behind the resilient strength signalled by the headline numbers, the survey data reveal an economy that is beset with uncertainty about the outlook, which is in turn dampening business spending and investment. Trends in hiring and business investment in fixed assets such as offices are showing signs of deteriorating, as is expenditure on IT, computing and other business services as worries about Brexit result in delayed spending decisions.”
In contrast to the evolution of the services sector, the IHS Markit/CIPS manufacturing PMI decreased from a multi-year high of 58.2 in November to 56.3 in December. However, the index remains well above the 50-point threshold that separates expansion from contraction in the manufacturing sector, where it has been since August 2016.
December’s slight decline was driven by slower growth in output, new orders and employment, although all three expansions were solid and above long-run trends. The slowdown in output growth was driven by a smaller increase in consumers goods, which more than offset faster increases in intermediary and investment goods. New export orders grew robustly, aided by greater demand from the U.S, China, the Middle East and Europe. On the price front, input price inflation was high in December, despite easing to a four-month low. As a result, output prices rose as firms looked to pass on increased costs to consumers.
According to Rob Dobson, Director at IHS Markit:
“The sector has…broadly maintained its solid boost to broader economic expansion in the fourth quarter. The outlook is also reasonably bright, with over 50% of companies expecting production to be higher one year from now.”
Author: Oliver Reynolds, Economist