Although January's UK manufacturing PMI rose to 47.0, that still left it in contractionary territory. While a marked rise in business optimism offers some good news, as does the recent fall in energy prices, the headwinds facing the sector mean the EY ITEM Club doesn't expect a significant turnaround in H1 2023.
The S&P Global/CIPS survey also pointed to a further cooling in input price inflation. Although this is unlikely to have much bearing on February's Monetary Policy Committee (MPC) decision, it is consistent with other indicators that show an easing in pipeline price pressures. In the EY ITEM Club’s view, this suggests that the committee is likely to pause its rate hiking cycle soon.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The manufacturing PMI rose to 47.0 in January from 45.3 in December, although this still left it in contractionary sub-50 territory for the sixth consecutive month. The relative improvement in the sector's performance was driven by a more positive outlook for demand and an easing in supply-chain constraints, although manufacturing output and new orders continued to fall.
“The survey pointed to a marked rise in business optimism, reflecting hopes of an improvement in domestic and global economic conditions. The recent large decline in energy prices also offers some upside for what is a relatively energy-intensive sector, even allowing for less generous government support on corporate energy bills from April. That said, energy prices are still high in absolute terms and demand, at home and abroad, and is likely to remain weak in the near term. As a result, the EY ITEM Club doesn’t expect a significant turnaround in the first half of 2023.
“Meanwhile, January's survey showed cost pressures easing. Although output price inflation ticked up slightly, input costs rose at the slowest pace in 27 months and this should slowly feed through into lower consumer price inflation. Lower cost pressures are unlikely to have much bearing on February's Monetary Policy Committee decision, where the EY ITEM Club expects a 50bps increase in the Bank Rate, however, this is consistent with other indicators that show pipeline price pressures are receding. This suggests the rate rise cycle is close to ending and the EY ITEM Club thinks Bank Rate at 4% could prove the peak.”