March PMIs add to the positive news on activity – EY ITEM Club comments

• March's flash UK S&P Global/CIPS survey encapsulated the dilemma facing the Monetary Policy Committee (MPC). On the one hand, the balances for costs and prices continued to fall, albeit from high levels. But on the other hand, activity appears to be rising again, and firms reported labour shortages.

• From the EY ITEM Club’s perspective, the considerable monetary tightening already in the system, but still to fully feed through, means that Bank Rate should already have peaked. But another rate rise in May is no longer the remote possibility it appeared a few days ago. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “March's flash S&P Global/CIPS survey reported a second successive month of activity growth, although the composite Purchasing Mangers’ Index (PMI) slipped to 52.2 from 53.1 in February. The divergence in sectoral performance remained significant, with the services PMI at 52.8 (February: 53.5), but the manufacturing PMI and output balances both remained below 50. These results and this morning's strong growth in retail sales suggest that quarter-on-quarter GDP growth will likely come in just above zero in Q1. 

“The detail of the survey was broadly positive. Services sector new business volumes rose at the fastest pace since last April, while manufacturing order books also edged up. Inflationary pressures continued to steadily cool, with firms reporting the lowest input cost inflation since March 2021, and lowest balance for output prices since August 2021, albeit both were still some way above historical norms.  

“In many ways, the S&P Global/CIPS survey encapsulates the dilemma facing the MPC. There's clear evidence that inflationary pressures are continuing to cool. But at the same time, activity is firming and today's survey also reported evidence of labour shortages and firm wage pressures in the services sector, which could add to the concerns of the MPC's more hawkish members that high inflation could persist. How the MPC balances these competing forces, alongside any developments on the financial stability side, will determine whether interest rates have already peaked. The fact that there is so much monetary tightening already in the system, although much of it has yet to fully feed through to activity or inflation, tips the balance in favour of Bank Rate peaking at 4.25% in the eyes of the EY ITEM Club. However, the developments of the past couple of days mean that a further rate rise in May is not quite the low probability outcome it had previously appeared.”