- The “flash” purchasing managers’ survey for the UK manufacturing and services sector pointed to combined output contracting at the fastest rate for 41 months in December, bringing a difficult-looking fourth quarter for the UK economy to an inauspicious end.
- December’s deeper contraction in activity was perhaps to have been expected given the particularly elevated uncertainties that faced the economy ahead of last Thursday’s General Election. Indeed, it was reported activity was hampered by domestic political uncertainties, a lack of clarity on Brexit and subdued global economic conditions. Manufacturing output was also held back by producers looking to reduce their stocks of finished goods
- Both manufacturing and services suffered deeper contraction in December. The dominant services sector recorded its worst performance for nine months. Additionally, manufacturing activity contracted at a deeper rate in November with the output index at an 89-month low
- It is worth noting that there were marked upward revisions in the final November PMI from the “flash” readings for both services (up to 49.3 from 48.6) and manufacturing (up to 48.9 from 48.3). The composite output index for services and manufacturing was also revised up appreciably (to 49.3 from 48.5). This may well lead to the “flash” UK PMIs being regarded with a fair degree of caution, at least until they become firmly established (November marked their introduction apart from a “one-off” in July 2016 after the June EU referendum).
- It is also worth bearing in mind that the “flash” December manufacturing and services PMIs were largely completed at a time of particularly heightened uncertainty – namely the run-up to the General Election. This is particularly significant given that the purchasing managers’ surveys can tend to present an overly gloomy picture at times of heightened uncertainties.
- Even allowing for this, the December “flash” estimates do little to inspire confidence over fourth quarter growth prospects. Our current expectation is that fourth-quarter GDP growth will be 0.1% quarter-on-quarter at best and there is a very real risk that the economy could stagnate. Much could depend on whether consumers – who have tended to be the most resilient part of the economy – spend a decent amount for Christmas.
- The forward-looking indicators of the survey do little to inspire hopes for a pick-up in activity in the first quarter of 2020. Overall new orders contracted for a fifth month running in December while backlogs of work were run down at the fastest rate since July 2016. There was also a further drop in employment, which added to the recent softer news on the UK labour market.
- Overall prices charged rose at the slowest rate since April 2016 pointing to a need to price competitively to gain business. It is notable that a stabilisation in new business in the services sector was reportedly helped by increased discounting as prices in the sector rose at the slowest rate since February 2016.
- The hope for both manufacturers and service companies is that the uncertainties surrounding the economy are significantly diluted by the decisive General Election result and the UK’s departure from the EU with Boris Johnson’s deal on 31 January – and that this encourages businesses to step up their investment and consumers to become more willing to splash out on big-ticket durable goods. Indeed, the surveys showed output expectations rising to a six-month high in December.
- However, significant Brexit concerns along with a challenging global environment may well limit the upside for investment in 2020 while consumers may well face less favourable fundamentals due to a softer labour market and reduced earnings growth.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
"The “flash” purchasing managers’ survey for the UK manufacturing and services sectors disappointingly – if unsurprisingly given the heightened uncertainties ahead of last Thursday’s General Election – indicated further and deeper contraction in both services and manufacturing activity in December.
“Indeed, it showed overall manufacturing and services contracting for a second successive month in December and at the fastest rate for 41 months, having been flat in October.
“Specifically, the composite output index for manufacturing and services weakened to 48.5 in December from 49.3 in November and 50.0 in October.
“Deeper contraction in activity in December was perhaps to have been expected given the particularly elevated uncertainties that faced the economy ahead of last Thursday’s General Election. Indeed, it was reported that activity was hampered by domestic political uncertainties, a lack of clarity on Brexit and subdued global economic conditions. Manufacturing output was also held back by producers looking to reduce their stocks of finished goods which had been built up ahead of the UK’s scheduled exit from the EU on 31 October.
“Worryingly for activity in the near-term at least, joint orders were reported to have contracted in December for a fifth month running. Backlogs of work were run down at the fastest rate since July 2016.
“The surveys also added to the evidence that the UK labour market is now softening in the face of a number of uncertainties (Brexit, domestic political, global economic) and a soft UK economy. Overall employment fell in the manufacturing and services sectors for a fourth month running in December.
“On a positive note, output expectations rose to a six-month high on hopes that the decisive election result will bring clarity and ease the uncertainties that have been weighing on demand.
“Some good news saw the rise in input prices remain much lower than earlier on in 2019. Prices charged rose at the slowest rate since April 2016 reflecting the need to price competitively to win business as well as softer input price rises.”
Services PMI at nine-month low
“The “flash” purchasing managers’ survey pointed to the services sector contracting for a second month running in December and recording its worst performance for 9 months. It had previously stabilised in October after contracting in September for the first time since March. Specifically, the services PMI fell back to 49.0 in December from 49.3 in November and 50.0 in October.
“December’s reading was clearly below the 50.0 level that indicates flat growth. It was also substantially below the services PMI lifetime (1996-2019) average of 54.9.
“However, some reasonably positive news saw new business stabilise in December after contracting over the previous three months – although this appeared to have been helped by increased discounting. Average prices charged by services companies rose at the slowest rate since February 2016 even though input prices picked up slightly.”
Manufacturing PMI at four-month low with output contracting at fastest rate for 89 months
“The “flash” purchasing managers survey pointed to manufacturing activity contracting for a ninth month running in December and at an increased rate compared to November. It points to the manufacturing sector still struggling markedly with both domestic and foreign demand under pressure.
“Domestic demand for manufactured goods has been hampered by businesses' caution over investment amid a number of uncertainties (Brexit, domestic economic and political, global economic) which is limiting expenditure on capital goods. Meanwhile, weakened global growth and an uncertain trading environment is weighing down on foreign demand for UK manufactured goods.
“Specifically, the PMI dipped to a four-month low of 47.4 in December from 48.9 in November and a six-month high of 49.6 in October (when it had been boosted by stockbuilding and sales ahead of the scheduled 31 October date for the UK to leave the EU). It had earlier hit a low of 47.4 in August (the lowest level since May 2012). December’s reading of 47.4 took the PMI further below the 50.0 level which indicates unchanged activity.
“Output contracted for an eighth month running in December and at the fastest rate for 89 months. Manufacturing output was also held back by producers looking to reduce their stocks of finished goods which had been built up ahead of the UK’s scheduled exit from the EU on 31 October.
“New orders also fell for an eighth month running in December and at a faster rate – reportedly affected by customer de-stocking, weak export sales and delayed decisions due to the General Election. There was also a drop in employment for a ninth month running.
“Input buying was at the weakest level since April 2009 after being built up in advance of the scheduled 31 October Brexit date. Stocks of inputs and finished products both fell.
“Price pressures were weaker in the manufacturing sector in December.”