April's composite Purchasing Managers’ Index (PMI) climbed to a 12-month high, adding to evidence that the underlying growth outlook is improving. But GDP could still struggle to grow in Q2, with May's extra bank holiday and the impact of ongoing public sector strikes likely to weigh on activity.
On the back of upside surprises in recent official inflation and wage data, today's survey reported that tight labour market conditions led to an acceleration in input cost inflation, which was subsequently passed onto consumers. This will have sent a hawkish signal to the Monetary Policy Committee (MPC) and reinforces the EY ITEM Club’s view that the committee will likely increase Bank Rate by a further 25bps in its May meeting.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “April's S&P Global/CIPS composite PMI rose to a 12-month high of 54.9 from 52.2 in March. The increase in economic activity was entirely driven by a rise in the services PMI to 55.9, up from March’s 52.9, with respondents suggesting improving consumer demand, both domestically and abroad, drove the strongest rise in new business in over a year.
“Today's survey results suggest that Q2 got off to a strong start. But while the underlying growth outlook is improving, two factors the surveys won't capture mean that GDP is likely to come in softer than the PMIs imply. First, recent experience indicates that the extra bank holiday in May will cause a large, temporary fall in activity in some sectors. Second, the impact of industrial action is likely to act as a drag on public sector output in Q2. Therefore, notwithstanding the stronger business survey results, the EY ITEM Club thinks there's still a good chance that GDP will struggle to expand in Q2.
“The survey will have sent a hawkish signal to the MPC ahead of next week's meeting. Respondents reported a rise in employment growth and tight labour market conditions, compelling employers to increase pay. This contributed to an acceleration in output price inflation as businesses sought to pass on higher input costs to consumers. With recent official labour market and inflation releases telling a similar story, it's almost certain that the MPC will raise Bank Rate by a further 25bps in its May meeting.”