Press release

22 Sep 2023 London, GB

PMIs deliver more signs of waning momentum – EY ITEM Club comments

After the composite PMI fell below the 50 'no-change' mark in August, September's flash index declined further into contractionary territory.

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  • A fall in September's flash composite Purchasing Managers’ Index (PMI) took it further below the 50 'no-change' mark and added to signs that the economy will underwhelm in Q3. While a return to a normal number of working days will flatter the comparison with Q2, the EY ITEM Club thinks GDP will struggle to eke out even modest growth in the current quarter.
  • Advanced sight of today's results was likely a key factor behind the Monetary Policy Committee (MPC) deciding not to raise Bank Rate yesterday. Sluggish growth is likely to characterise the rest of this year and much of 2024, as the lagged impact of tighter monetary policy builds. But falling inflation, a return to real growth in pay and growing confidence that interest rates have peaked should keep the economy from contracting.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “After the composite PMI fell below the 50 'no-change' mark in August, September's flash index declined further into contractionary territory. A fall to 46.8 from August's 48.6 left the PMI at the lowest since March 2009, excluding the pandemic. The decline was driven by a fall in the flash services PMI to 47.2 from 49.5, with demand hit by cost-of-living pressures and higher interest rates. The output balance of the S&P Global/CIPS manufacturing survey ticked up slightly, but an index of 44.6 was still weak.

“The recent softness of the PMIs is consistent, based on past form, with the economy contracting in Q3. However, the monthly activity surveys exclude the retail and public sectors, so give only a partial picture. But recent weakness in retail and the impact of continued industrial action on public sector output means these sectors are unlikely to do much, if anything, to lift the economy.

“On the other hand, the fact that Q3 has an additional working day compared with Q2, following May's one-off public holiday for the coronation, should mechanically boost growth. And the PMIs can be swung unduly by sentiment, which a flurry of headlines about the adverse effect of higher interest rates won’t have helped. But overall, the EY ITEM Club thinks GDP will struggle to grow even modestly in Q3.

“Bouncing along the bottom is likely to be a story which persists for the near-term. The full effect of interest rate rises has yet to come through, inflation is still high, and the labour market's resilience is receding. But the economy should have enough supports to avoid a serious downturn. Inflation should continue to fall, aided by easing cost pressures. On that note, cost and prices balances of September's survey were both at the weakest in over two-and-a-half years. Combined with still-strong pay growth, real wages have begun to rise again. And a growing sense that interest rates have peaked following the MPC's decision to pause this month may support consumer and business sentiment. Indeed, advanced sight of today's results probably played a key role in that decision.”