Purchasing managers report modest pick-up in services activity in May but still weak - EY ITEM Club

05 June 2019

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  • Some relief for UK economy as the purchasing managers report a modest pick-up in activity in the services sector in May after disappointingly reporting contraction in manufacturing and construction activity.
  • Even so, this is still hardly a buoyant survey and overall the purchasing managers’ surveys point to the economy having a difficult May and headed for weak growth in the second quarter following the UK’s delayed exit from the EU.
  • We suspect that the economy will struggle to grow any more than 0.2% quarter-on-quarter in the second quarter following expansion of 0.5% in the first quarter - as it is hampered by some unwinding of the major stockbuilding that occurred in the first quarter amid concerns of a disruptive Brexit occurring at the end of March. Prolonged Brexit uncertainties, a fraught UK political situation and a challenging global economic environment are also weighing on economic activity in the second quarter.  
  • There was modest improvement in most areas of the services survey in May but it is still in the slow lane. Overall activity was at a 3-month high, while new business growth rose for the first time this year but only marginally. Jobs growth was at a 6-month high while confidence improved to an 8-month high.
  • While some improvement was reported in underlying business conditions, Brexit uncertainties was still said to be holding back client demand. Business and consumer spending was reported subdued.
  • The overall weakness of the May purchasing managers’ surveys reinforces belief that the Bank of England will maintain a cautious “wait and see” approach on interest rates amid heightened economic, political and Brexit uncertainties. We believe the Bank of England is likely to keep interest rates at 0.75% through 2019.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The services PMI pointed to the sector seeing modestly improved but still limited growth in May. This was a second month of limited growth after the survey indicated contracting activity in March for the first time since July 2016 (which was in the immediate aftermath of the UK’s referendum vote to leave the EU).

“Nevertheless, services expansion in May remained substantially below its long-term average.

“Specifically, the services business activity edged up to a 3-month high of 51.0 in May from 50.4 in April and 48.9 in March. It had previously dipped to 48.9 in March from 51.3 in February while the first quarter average of 50.1 had been the weakest quarterly average since the fourth quarter of 2012.

“May’s reading of 51.0 indicated modest expansion given that it was still not that far above the key level of 50.0 which indicates flat activity. It was substantially below the series’ lifetime (1996-2019) average of 55.0.”

Purchasing managers surveys point to weak economy in the second quarter
“Overall, the May purchasing managers surveys point to a weak UK economy in the second quarter following the UK’s delayed exit from the EU. Indeed, the purchasing managers indicated that only the services sector achieved growth in May and that was modest.

“Manufacturing activity was reported to have contracted modestly and been at a 34-month low in May as the high stock levels that had been built up in the first quarter amid concerns of a disruptive Brexit occurring at the end of March weighed down on output and deterred clients from placing new orders. Meanwhile, construction activity was reported to have been at a 14-month low in May as it contracted for the third time in four months.”

Services new business edged up for first time this year in May
“The survey indicated that services new business growth edged up for the first time this year in May. It had previously contracted over January-April, which was the first time that services new business had contracted for four successive months since late-2008/early-2009.

“Services companies reported some improvement in underlying business conditions in May. Even so, Brexit uncertainties were still said to be holding back client demand. Business and consumer spending was reported subdued.

“Export demand was reported to have weakened, with Brexit uncertainties having a negative impact on demand from European clients.

“The modest improvement in activity and new orders helped confidence in the sector improve to its highest level since last September despite concerns over the UK political situation.

“Another positive saw services employment grow at the fastest rate for six months in May after contracting marginally in April (which had been the third drop in services employment in four months - these were the first declines in services employment since July 2016).

“Input prices for services companies eased modestly to a 12-month low in May. Prices charged rose at the fastest rate so far in 2019 but the prices data still suggested a squeeze on service companies’ margins.”