January's composite PMI signalled a modest decline in UK business activity, as new business volumes continued to fall. The fall in the composite index was accounted for by a slowdown in the services sector and the EY ITEM Club thinks that prospects here are likely to remain subdued in the near-term.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “January's S&P Global/CIPS survey reported a slight fall in the composite PMI to 48.5 from 49.0 last month. This signalled a bigger decline in private sector activity than in December. The fall was entirely driven by a decline in the services sector PMI to 48.7 from 49.9, as elevated recession risks and higher borrowing costs resulted in a fall in new business.
“The services sector is likely to remain subdued in the short-term, driven by weakness among consumer-facing businesses. High inflation and rising interest rates are weighing on discretionary spending power and consumers have so far had little appetite to take on more debt or draw on excess savings. However, taking a longer-term view, today's survey offered some glimmers of hope, pointing to an improvement in businesses optimism due, in part, to tentative signs of an improved global economic outlook and hopes that pressures from high energy prices are abating.
“January's services survey also showed a cooling in input cost pressures. Respondents cited falling commodity prices as contributing to the lowest pipeline price inflation since August 2021. That said, businesses passing on higher wage costs resulted in a slight uptick in selling price inflation. Lower cost pressures support the dovish shift in the Monetary Policy Committee’s messaging in yesterday's interest rate decision. Although inflation risks remain – such as persistently strong pay growth – there is growing evidence of disinflationary pressures which reinforces the EY ITEM Club’s view that Bank Rate may have peaked.”