PMI services figures are ‘relief’ after last week’s dismal manufacturing data, but will create a dilemma for the MPC - ITEM Club

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s PMI services figures:

  • These results come as a relief after last week’s poor manufacturing data
  • But weaker confidence is a worrying sign – a similar deterioration last autumn preceded a drop in activity
  • Today’s MPC decision will be finely balanced and could go either way

“These results come as somewhat of a relief after the sharp decline in activity reported in the manufacturing survey last week. The increase in new business is particularly comforting as it suggests that activity should remain reasonably firm in the near-term.
“But the fact that the escalation of the Eurozone crisis has once again damaged business confidence is a concern. The experience of last autumn demonstrates how such a deterioration in sentiment can rapidly affect activity, with firms putting their investment and recruitment plans on ice. It re-emphasises the importance of policymakers getting a firm grip on the crisis and offering a sustainable solution.
“The results of the PMI surveys create a major dilemma for the MPC ahead of today’s monetary policy decision. On one hand, the firmer services and construction data suggest that the situation hasn’t moved on significantly since the May meeting. But on the other, the dire manufacturing results and the deterioration in confidence imply that further policy support is in order.
“In previous months, the MPC have hinted that high inflation rates were discouraging them from offering any further stimulus. But the results of this survey and last week’s manufacturing data suggest that this threat is diminishing significantly as both input cost and output price inflation have eased considerably. Today’s decision will be very finely balanced and it could go either way.”