Manufacturing sector improves but UK economy not out of the woods yet

A general view of the skyline of commercial buildings, is seen, In London, Britain, Wednesday, July 12, 2023.
A general view of the skyline of commercial buildings, is seen, In London, Britain, Wednesday, July 12, 2023. Copyright Kin Cheung/AP
Copyright Kin Cheung/AP
By Indrabati Lahiri
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The latest set of economic data from the UK has come in strong for November indicating that there may be hope for the British economy after all.


The flash estimate for the UK S&P Global/CIPS Manufacturing purchasing managers’ index (PMI) for November clocked in at 46.7. 

This was a step up from October’s 44.8, as well as analyst estimates of 45. Although output was still contracting, it was at the slowest rate in five months.

However, employment levels and new orders kept falling as the UK economy continues to struggle with weak demand. Growth projections also saw their lowest since last December.

The manufacturing PMI measures a weighted average of five indicators, namely suppliers’ delivery times (15%), new orders (30%), employment (20%), output (25%) and stocks of purchases (10%).

Matthew Ryan, head of market strategy at Ebury, said the UK PMI numbers were “rare positive news”. 

“The rebound in services activity, in particular, should somewhat allay concerns over the possibility of a UK recession and we remain quietly hopeful that a contraction in GDP will be avoided in the final quarter of the year,” he said.

Ryan added that the sharp easing in inflationary pressures should provide welcome relief to businesses, as should the growing likelihood that the Bank of England has already reached a peak in rates.

He added however that the UK economy “remains far from rosy”, as according to today’s data, total new orders declined for the fifth straight month and export demand fell amid weak demand from abroad.

“At best, we expect only modest expansion in the UK economy in the coming months and at worst, no more than a mild technical recession,” Ryan said. “This rather fragile growth outlook could act to hold back UK assets and may present somewhat of a risk to our generally optimistic view on the pound.”

The UK Services PMI for November came in at 50.5, up from analyst expectations as well as October’s 49.5. The Services PMI is based on survey results provided by services sector firms in the UK, and is a diffusion index.

This figure was mostly boosted by service providers’ output inching up slightly, supported by backlogs clearing. However, new business orders were still falling, as the UK services industry felt the heat from higher interest rates as well. 

Rising wages also eroded into profit margins. This highlighted the Bank of England Governor Andrew Bailey’s recent comments about sticky high pay growth in the UK.

Bailey also recently warned that it was “too early to talk about interest rate cuts” and the UK economy still faced a range of upside risks due to ongoing geopolitical concerns. As such, it is not unlikely that the Bank of England could still raise rates in the near future, impacting PMIs down the line.

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