October's flash Purchasing Managers Indices (PMIs) offered no let-up in the trend of slowing activity evident since the spring. The services index joined its manufacturing peer in contractionary, sub-50 territory, although weaker demand does at least appear to be contributing to an easing in inflationary pressures.
More signs that the economy is heading into recession are expected to temper the Monetary Policy Committee's (MPC) appetite to raise interest rates significantly in its next meeting. The suggestion that fiscal policy looks likely to be tightened further under a new prime minister carries the same implication.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “Intense cost of living pressures, political uncertainty and depressed sentiment among respondents to the monthly S&P Global/CIPS activity surveys meant substantial falls in October's flash PMIs were no surprise. The flash services index of 47.5, down from September's 50.0, passed an unwelcome milestone, coming in below the 50 'no-change' mark for the first time since February 2021. And the manufacturing PMI moved further into contractionary territory, falling to 45.8 from 48.4 a month earlier. These moves pushed the composite index down to a 21-month low of 47.2 from 49.1.
“The silver lining suggested by the PMIs was a decline in the surveys' measure of cost and price pressures. Overall input cost inflation faced by private sector firms eased to its lowest since September 2021, albeit remaining high by historical standards, and growth in prices charged moderated to a 14-month low.
“More evidence of economic weakness, combined with signs of less heated inflationary pressures, should, all else equal, tone down the MPC's appetite to raise interest rates substantially in its November meeting. The reversal of almost all the mini-Budget's tax cuts and the possibility of further fiscal tightening in the forthcoming fiscal statement point in the same direction. The EY ITEM Club now expects the MPC to raise rates by 75bps in November, a position to which retreating market rate expectations (down from a predicted rise of 150bps in late September to below 100bps at present) are moving closer.”