UK PMIs (Aug, flash)

• The UK composite PMI fell to a 31-month low of 47.9 in August, below consensus of 50.4 and signalling contraction for the first time since January.
• The services activity index fell from 51.5 to 48.7 (consensus: 51.0) while the manufacturing PMI fell to just 42.5, its lowest since May 2020.
• The survey suggested that inflationary pressures should continue to ease, but the inevitable pain of higher interest rates is increasingly evident in activity.

Source: Finlogix Economic Calendar

FactsIn July, the UK PMIs experienced a more significant decline than anticipated. The services PMI dropped from 51.5 to 48.7, falling below the consensus forecast of 51.0. Similarly, the manufacturing PMI decreased from 45.3 to 42.5, compared to the consensus estimate of 45.0. This marked the first instance since January that the services index dipped below the threshold of 50, indicating contraction. Moreover, the manufacturing PMI has now descended to levels reminiscent of the initial Covid-19 lockdown in May 2020.

Consequently, the composite PMI for the UK tumbled to 47.9, a substantial drop from the consensus projection of 50.4. This level is the lowest recorded since January 2021. The PMI data implies a contraction in overall economic activity, a situation not observed since January of the current year. New orders indices saw a notable decrease, particularly in the manufacturing sector, where they reached depths like those witnessed during the pandemic. The survey provider attributed this decline in new orders to clients' reluctance to spend, likely due to higher interest rates and strained household incomes. However, some positive aspects were noted, such as a resilient demand for international travel and leisure services.

In more positive news, the input and output cost indices continued to decline. This suggests that inflationary pressures continued to ease throughout August. Notably, input costs escalated at the slowest rate observed in two and a half years. Nevertheless, the survey provider highlighted persistent reports of strong wage pressures.

Although the pace of hiring decelerated within the service sector, the employment index managed to remain above the 50 mark (see Chart 4). Furthermore, while the manufacturing sector still reported a reduction in headcount, the pace of reduction slightly eased. Despite the decline in activity, job creation persists, a trend we explored in our analysis on June 30th titled "Jobful Recession."

Considering the rather bleak outlook painted by the activity and orders data, the August survey demonstrated only a marginal moderation in business expectations. Notably, business expectations within the service sector remain significantly higher than their levels during the latter half of the previous year.

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