January's flash S&P Global/CIPS survey reported another fall in business activity, as soft demand continued to affect new orders. Moreover, the pace of the decline quickened compared to December, driven by a fall in services sector activity.
However, optimism around the outlook improved and the survey also pointed to a further easing in cost and price pressures. The latter development likely won't stop the Monetary Policy Committee (MPC) from raising rates next week. However, it does reinforce the EY ITEM Club’s expectation that the rate raising cycle will soon come to an end, with Bank Rate peaking at 4% early this year.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The January flash S&P Global/CIPS survey reported a fall in the composite PMI to 47.8 from 49.0 last month. The decline was entirely driven by a weaker services PMI which fell to 48.0 from 49.9 in December. However, manufacturing activity, while still contracting in January, declined at a slower pace, with the PMI rising to 46.7 from 45.3 last month.
“In line with the fall in the composite PMI, underlying business conditions remain tough for both manufacturing and service sector firms. Survey respondents cited another fall in new business orders, with weak demand and large energy bills adding to the pressure on businesses’ margins. However, optimism among firms picked up to the strongest degree since last May, reflecting hopes of an improvement in global economic conditions and a further slowdown in cost pressures.
“Indeed, January's survey added to signs that these pressures are already easing, indicating a further slowdown in cost and output price inflation. The former fell to the lowest since April 2021, while prices charged inflation was the weakest since August of the same year. The EY ITEM Club doesn’t think these developments will stop the MPC raising interest rates next week. Given stubbornly high core inflation, the EY ITEM Club expects a 50bps rise. However, better signs on the inflation front reinforce the EY ITEM Club’s view that the rate raising cycle will soon end, with Bank Rate peaking at 4% early this year.”