September's UK S&P Global/CIPS services PMI was at a 19-month low and signalled stagnation in the economy's biggest sector. The EY ITEM Club expects the slowdown to intensify in the short term, driven by market volatility and financial conditions tightening.
Positively, the services survey did point to an easing in cost pressures. While declining activity and a slowdown in cost inflation would normally be met with a dovish response from the Bank of England, the EY Item Club still anticipates that the Monetary Policy Committee will increase rates by at least 75bps in November.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “September's services PMI stagnated, falling to 50.0 from 50.9 in August. The services PMI has slowed consistently since March, but September's index finally signalled stagnation in activity and was the lowest in 19 months. Weighting September's services and manufacturing PMIs together, the composite index fell to 49.1 from 49.6, the lowest for 20 months.
“Following the Government's mini-Budget, it is likely that the deterioration in the services and composite PMIs partly reflects financial market volatility turmoil and the recent rise in borrowing costs, along with pre-existing weakness in demand. The outlook is downbeat, given that the full force of headwinds from elevated inflation, higher interest rates and cost pressures from sterling's softness have yet to be fully realised.
“September's survey did indicate the easing of some inflationary pressures. This was driven by a fall in the survey's measure of input price inflation to a nine-month low, although growth in prices charged remained close to an historic high. Nevertheless, the EY ITEM Club does not expect September's results to weaken the Monetary Policy Committee’s resolve in tackling inflation. The committee will be paying closer attention to recent fiscal loosening and the rise in risk premia attached to UK assets, so overall the EY ITEM Club still expects that the MPC will increase interest rates at its next meeting in November.”