Short-term outlook for services appears strong - EY ITEM Club comment

5 December 2016

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  • The short-term outlook for services looks strong, with activity picking up and the new order pipeline firm
  • Q4 is likely to see GDP growth emulate the 0.5% achieved in Q3, with some upside risk
  • But subdued corporate confidence and growing inflationary pressure point to a slowdown in 2017

Martin Beck, senior economic advisor to the EY ITEM Club comments: “The CIPS survey for services reported a strengthening in the headline PMI from 54.5 in October to 55.2 in November. This was the highest balance since January and ensured that the composite PMI also rose to a ten-month high.

“A solid increase in new work bodes well for activity over the next few months. But the soft reading for business expectations is consistent with the notion that heightened uncertainty means that some companies are wary of committing to capital projects. And, as with the other CIPS surveys, evidence of rapid input cost inflation suggests that consumers are likely to feel the pinch next year.

“Based on past form, the recent PMI results are consistent with relatively tepid growth in services output of around 0.5% in Q4, although it must be noted that the official data has been tracking some way ahead of the PMI for the past year. Our short-term model is currently flagging services output growth of around 0.8% in Q4, in-line with the performance seen in Q3. This would keep us on track to at least emulate Q3’s GDP growth of 0.5%, although there is some upside risk to this estimate given the extent to which some of the smaller sectors weighed on growth in Q3.”

ENDS

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