- December's flash S&P Global/CIPS survey reported a further decline in UK business activity, as new business volumes continued to fall, albeit at a slower pace than in November.
- The survey provides evidence that businesses are beginning to reduce headcounts while struggling to raise prices.
- The EY ITEM Club predicts the Monetary Policy Committee (MPC) will soon be able to pause rate rises.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The December flash S&P Global/CIPS survey reported a rise in the composite PMI to 49.0 from 48.2 in November, as the pace of contraction eased. This pickup was due to a stronger services PMI, which rose back to 50 from 48.8 in November. By contrast, the manufacturing sector reported a deeper decline in output and a weaker PMI.
“Underlying conditions remain challenging, with both services and manufacturing companies reporting further falls in new business. The EY ITEM Club thinks this situation is likely to persist in H1 2023. Consumer-facing businesses will likely see their customers' spending power further affected by falling real incomes, rising unemployment, and higher interest rates. While the business sector is navigating headwinds from several sources, including weak demand and high energy costs, resulting in squeeze of corporate budgets.
“The responses on labour market conditions, costs and prices were consistent with the EY ITEM Club’s view that the market is approaching the point where the MPC will be able to slow or pause monetary tightening. Growth in costs continued to cool, although they currently remain well above historical norms. Businesses reported that they were encountering increasing challenges in terms of passing on cost increases in the form of higher prices. The survey also reported the first decline in headcount since February 2021, as businesses reacted to falling demand and high non-labour costs. The persistence of domestic inflationary pressures and the risk that a tight labour market would generate strong wage growth have seemingly been the two factors concerning MPC members, so, if the signals from this survey are repeated in the official data, it is likely the MPC will feel it can pause rate rises.”