- The manufacturing PMI continued to report a very robust pace of activity growth in June. However, the EY ITEM Club suspects it probably overstates the strength of the sector and expects services to have been the key drtiver of GDP growth in Q2
- June’s survey highlighted the issues of supply chain disruption and escalating cost pressures. Although the EY ITEM Club expects both factors to prove temporary and to ease moving through the second half of the year, they do represent key risk factors for the sector.
Martin Beck, senior economic advisor to the EY ITEM Club, says:
“The manufacturing PMI came in at 63.9 in June, only slightly lower than May’s record high of 65.6. The detail of the survey showed broad-based strength, with orders, output and employment all growing at very strong rates and backlogs of work increasing.
“However, reading across to the official manufacturing data comes with a note of caution. The relationship between the PMI and the ONS measure of manufacturing output has become much weaker during the pandemic. This is partly because the headline PMI is a composite indicator, rather than a pure measure of output. But it is also likely to reflect answering practices, with many respondents offering something other than the month-on-month comparisons they are asked for. This means the ONS measure of manufacturing output is likely to be much softer than the historical relationship with the PMI implies, and the EY ITEM Club’s expectation that GDP grew by over 5% quarter-on-quarter in Q2 is heavily dependent on a robust rebound in services output.
“June’s survey also highlighted two interrelated issues which are likely to be key influences in the second half of this year – supply chain disruption and cost pressures. The semiconductor shortage, which is a function of strong demand, should ease through the second half of the year, as increased supply comes on stream, though it is likely to cause problems for some sectors in the intervening period. The EY ITEM Club also expects the pickup in cost pressures, and its feed through to consumer prices, to prove transitory.”