December’s UK PMI signals that the economy is still resilient

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Last week IHS Markit released the monthly UK PMI’s covering the manufacturing, construction and services sector for the month of December. According to the report, the Purchase Manager’s Index surveys showed that, despite the ongoing uncertainty surrounding Brexit, the activity across the sectors remained resilient.

Growth was seen rising at a steady pace although, the downside risks came from a slower pace of new orders and a slowdown in hiring. Price pressures however, remained at the highest level in nearly a decade, underlining the strong surge in consumer prices in the UK. Firms were seen passing on the costs of higher pressures to the customers.

With the release of the PMI’s for December, the fourth quarter data showed that the output index for the all sector PMI was steady at 54.7. According to IHS Markit, this suggests that the UK economy was growing at a quarterly rate of 0.4% on average.

 

UK All Sector PMI - December 2017
UK All Sector PMI – December 2017UK

 

Among the three sectors, services picked up momentum at the second fastest pace in eight months during December. The data was in line with the average PMI reading for the year.

The services PMI showed that business activity had picked up but, growth of new orders and employment were soft. On a seasonally adjusted basis, services PMI was seen rising to 54.2 in December, up from 53.8 previously.

The December increase was the second fastest increase of pace since April last year. So far, higher levels of business were recorded for seventeen consecutive months. New business volumes in the services sector had risen at a solid pace during the month.

Activity in the construction sector was however weaker. Data showed that the construction PMI was at 52.2 in December, down from November’s reading of 53.1. However, with the index still above 50, the construction sector is expected to have continued to expand.

Construction PMI survey responders said that house building was a key engine of growth. Residential work was seen expanding for the sixteenth consecutive month during December. But, commercial construction continued to remain in a downtrend since July.

Despite the weak print, the December construction PMI showed that businesses were resilient with demand for new construction projects staying steady. New order volumes in the construction sector was also seen rising steadily in May.

The services sector was also hit by higher price pressures with survey respondents noting that price of construction material had increased significantly.

The manufacturing PMI was also below forecasts at 56.3 in December. This was weaker than November’s print of 58.2 which marked a 51-month high. The moderation in the PMI index for December did not change the views much in the sector as the average reading in the fourth quarter was at 57.0, marking the best increase since the second quarter of 2014.

Output growth was seen accelerating in the intermediate and investment goods sector. However, consumer goods were seen slowing. Export sales increased amid demand from clients abroad that included Europe, the U.S., China and the Middle East.

The rate of increase in the input costs was seen easing to a four month low in December but remained positive.

Combining the three sectors, the average GDP growth rate that is forecasted, falls in line with the Bank of England’s projections. The UK economy is projected to grow around 0.3% – 0.4% in the fourth quarter of the year. The BoE hiked interest rates for the time in a decade in November last year, bringing the key interest rate to 0.5%.

The central bank cited higher inflation as one of the reasons. Wage growth continues to lag, failing to keep pace with the rate of inflation increased.

 

 

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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