Serious concern for UK Economy as Purchasing Managers indicate services activity stagnated in January

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There is no masking the fact that this is a seriously disappointing report on the UK economy, says a report from the EY Item Club, a leading UK economic forecasting group.

The group points to services activity essentially stagnating in January and the drop in new business which, it says, does not bode well for activity in the near term at least.

Reinforcing the weakness of the report, employment in the sector fell for the first time since December 2012. Confidence in the sector remained weak compared to long-term norms despite improving slightly from December’s 29-month low.

The survey magnifies the evidence that the UK economy has seen a poor start to 2019 amid heightened Brexit and political uncertainties as well as a weakening global economic environment. The stagnant services Purchasing Managers’ Index (PMI) completed a disappointing set of January surveys – with the construction PMI at a 10-month low and the manufacturing PMI at a three-month low and the second weakest since July 2016.

The January PMIs suggest that our already weak expectation that UK GDP growth will be limited to 0.2-0.3% quarter-on-quarter in the first quarter of 2019 could be optimistic.

Brexit uncertainties were reported to have led to more cautious spending by some companies and increased risk aversion on new projects. Consumer caution was also evident.

The January PMIs leave little doubt that the Bank of England will remain firmly in “wait and see” mode on monetary policy at February’s Monetary Policy Committee (MPC) meeting this week and until after the Brexit situation becomes clearer. Moderating inflation supports a cautious approach on interest rates.

Howard Archer, chief economic advisor to the EY ITEM Club, comments: “The services PMI pointed to the sector essentially stagnating in January as it was at the weakest level since July 2016 (which was in the immediate aftermath of the UK’s referendum vote to leave the EU) and at the second lowest level since December 2012. Subdued business and consumer spending weighed on services activity in January. Heightened Brexit uncertainty was reported to be affecting business investment decisions.

“Specifically, the services business activity index dipped to 50.1 in January after improving modestly to 51.2 in December from a 28-month low of 50.4 in November. This pointed to essentially flat activity. It was below the overall 2018 average of 53.0 and its lifetime (1996-2019) average of 55.0.”

Weak PMI’s for January point to a poor start to first quarter for UK economy

“Overall, the purchasing managers surveys point to very weak UK economic activity in January. Along with the subdued services survey, the construction PMI showed activity at a 10-month low in January with marginal growth. Additionally, the manufacturing PMI was at a three-month low and at the second lowest level (after October 2018) since July 2016, in the immediate aftermath of the UK’s referendum vote to leave the EU.

“Weakened new business across the three surveys point to further struggles for the economy in the near term at least.”

Services new business contracted in January

“Reinforcing the poor news on the services sector, new business contracted in January for the first time since July 2016. Brexit uncertainties were reported to have led to more cautious levels of spending by some businesses and increased risk aversion on new projects. Consumer caution was also evident.

“Employment growth in the services sector fell for the first time since July 2016. In addition to weakened activity, this seems to have been partly due to difficulties in filling staff vacancies due to a lack of suitably skilled candidates

“Reflecting stagnant activity and falling new business, confidence in the services sector remained weak although it did improve slightly from December’s 29-month low.

“Input prices rose at a slightly increased rate in January. Prices charged dipped to a four-month low.”