- June's flash S&P Global/CIPS survey encapsulated the challenge facing the Monetary Policy Committee (MPC). Momentum in activity eased but price and wage pressures remained significant. The latter will probably give the MPC reassurance that its substantial 50bps rise in Bank Rate in June was justified.
- The scale of monetary tightening now in play means the EY ITEM Club expects activity growth to remain limited throughout 2023. But the effects of higher interest rates will be mitigated by lower energy prices.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The flash S&P Global/CIPS survey for June signalled a slowdown in activity growth, with the composite Purchasing Managers’ Index (PMI) falling to 52.8 from 54.0 the previous month. While a divergence in sectoral performance persisted, the slower pace of expansion was driven by declines in the PMIs for services (down to 53.7 from 55.2) and manufacturing (down to 46.2 from 47.1). Growth in services activity was driven by resilient spending on business and financial services, but this was tempered by weaker consumer demand. A decline in manufacturing output was attributed to subdued demand and customer destocking.
“Survey respondents reported an easing in input cost inflation, particularly in the manufacturing sector, which reported an outright fall in factory gate prices for the first time in more than seven years. However, the picture for services was less reassuring. Service providers reported a far more modest fall in input costs, moderated by still-strong wage growth. And while output price inflation softened slightly, it remained elevated.
“The minutes of June's MPC meeting were explicit in saying the committee attaches less weight to forward-looking indicators – a category which includes the PMIs – than the official data. But evidence provided by today's survey will give the MPC reassurance that its decision to go for a 50bps rise in rates this month was justified. And with inflation proving stubbornly persistent and mortgage holders feeling the effects of higher rates, evidence of weaker momentum in the latest PMIs may continue. However, falling energy prices present a significant positive for activity and mean predictions of recession may be overdone.”