- The final services purchasing managers’ survey for December painted a significantly better picture than the “flash” one, offering hope that the sector and the economy will benefit from the decisive General Election result and greater clarity on Brexit.
- The December services PMI was revised up to 50.0 from the “flash” reading of 49.0, indicating stable rather than contracting activity. It was also up from 49.3 in November. December’s upward revision from the “flash” reading was perhaps only to be expected as the “flash” PMIs were largely completed at a time of 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.
- It is evident that survey replies received after the General Election were more upbeat – there had been reports that activity and new business was hit early on in December by some companies delaying business ahead of the election.
- In particular, optimism over the outlook rose to the highest level since September 2018, with some services companies expecting a short-term boost to activity from greater clarity over the near-term Brexit situation. Indeed, the new business index was revised up to be at a five-month high in December, showing modest growth after the “flash” reading had indicated flat orders. Employment growth in the sector was at a five-month high, although the increase was modest.
- Another positive was that there were reports of higher underlying consumer activity at the end of 2019.
- Prices charged by services companies rose at the slowest rate since February 2016 suggesting that services companies saw a need to price competitively to gain business. This was despite input prices rising at a faster rate, so services companies’ margins were squeezed more.
- The purchasing managers’ surveys for December still point to overall contraction across the services, manufacturing and construction sectors. The composite output index for services and manufacturing was stable at 49.3 in December (revised up from the “flash” reading of 48.5) pointing to clear contraction. Additionally, the December construction PMI also pointed to clear contraction, coming in at 44.4.
- Even allowing for the fact that the purchasing managers’ surveys can tend to present an overly gloomy picture at times of heightened uncertainties, the December surveys fuel suspicions that the UK economy likely stagnated in the fourth quarter.
- The hope for both service companies and manufacturers is that the uncertainties surrounding the economy are significantly diluted by the decisive General Election result, and the now inevitable UK departure from the EU with 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.
- However, a concern for the economy is that still significant Brexit uncertainties and 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 final purchasing managers’ survey pointed to the services sector stabilising in December after contraction in November.
“Specifically, the services PMI rose to 50.0 in December (revised up from the “flash” estimate of 49.0) after dipping to 49.3 in November from 50.0 in October.
“December’s reading was in line with the 50.0 level that indicates flat activity; it was substantially below the services PMI lifetime (1996-2019) average of 54.9.
“Domestic political uncertainty was reported to have weighed down on business and consumer spending on services in November. Consumers were reported to have become more cautious in spending on big-ticket items.
Purchasing managers’ surveys point to economy contracting in fourth quarter of 2019
“The purchasing managers point to ongoing contraction in activity across the services, manufacturing and construction sectors in December.
“The composite output index for services and manufacturing was stable at 49.3 in December (revised up from a “flash” reading of 48.5) after dipping to this level in November from 50.0 in October; this is the lowest level since July 2016 and points to clear contraction. Additionally, the construction PMI was down at 44.4, also pointing to declining activity.
“Ongoing contraction in activity in December was perhaps to have been expected, given the particularly elevated uncertainties that faced the economy ahead of the General Election that took place on 12 December. Indeed, it was reported that activity was hampered by some companies delaying business and new orders ahead of the General Election.
“However, there were signs in the survey that some new business was already being placed after the decisive election result with the new orders index revised up.
“Even allowing for the fact that the purchasing managers’ surveys are prone to portraying an overly gloomy picture at times of heightened uncertainties, there now looks to be a very real danger that the economy stagnated in the fourth quarter.”
December services survey offers grounds for hope
“Some positive news saw new business rise to a five-month high in December and grow modestly after three months of contraction.
“Meanwhile, backlogs of work declined for a 15th consecutive month but at a reduced rate.
“Confidence in the services sector rose to the highest level since September 2018 with some services companies expecting a short-term boost to activity from the near-term Brexit situation being resolved.
“Employment in the sector was at a 5-month high, although the increase was modest.
“Prices charged by services companies rose at the slowest rate since February 2016, suggesting that services companies saw a need to price competitively to gain business. This was despite input prices rising at a faster rate, so services companies’ margins were squeezed more.”