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- Composite: 53.9 vs 52.2 expected
- Services: 54.9 vs 52.8 expected
- Manufacturing: 46.6 vs 48.4 expected
The pattern for UK data this week had been one of hotter-than-expected headline numbers, with the exception of this morning’s retail sales, and April’s flash PMI print has continued that trend.
The composite PMI measure, expected to print flat on last month at 52.2, instead rose to 53.9, indicating a modest expansion in economic activity. The positive beat was not the only trend that held true for the UK this morning, which following on from Eurozone readings earlier in the day, showed robust expansion in services was offset by a contraction in manufacturing. While the April data showed the UK economy continued to grow on a strong footing, largely due to the limited size of its manufacturing sector, it did reinforce the need for a further rate hike from the BoE. Lower energy costs and an improvement in supply conditions led to the slowest increase in input costs for over two years. However, strong wage pressures led to a substantial increase in output charges, particularly across services as firms looked to protect profit margins. This continued the pattern from March where firms identified that ongoing wage inflation had limited the ability to discount prices, and that higher wages were being passed on to customers. For the Bank of England, already reeling from a higher than expected headline CPI in March that showed prices growing at 10.1% YoY, this will be worrying news.
With wage growth also remaining stubbornly high, and February numbers showing weekly wages increased by 5.9% on a 3m/YoY basis, that firms feel able to pass on increasing wage costs will raise the ominous spectre of an emerging wage-price spiral.
Signs of robustness in both activity and wage pressures seem to be mostly confined to the service sector, however, where the PMI showed a reading of 54.9, despite having been expected to slow marginally from 52.8 down from 52.9. This was in contrast to a manufacturing sector which underperformed even the low pre-release expectation of 48.4, ultimately printing at 46.6. Whilst cost pressures and a shortage of candidates once again weighed on hiring in April, the employment sub-index ticked up to a six-month high, underscoring that labour demand remains firm as long as workers keep coming available. However, this will come as a worry for the BoE as firms continued to report rising staff costs as the number one reason for rising input costs. While February’s employment data showed signs that marginal employment gains are no longer as inflationary as they once were, this wasn’t abundantly clear in the responses from April’s PMI survey. However, with core services inflation tracking below the BoE forecast of 6.8%, printing at 6.6% by our estimate, we don’t think it is time for the MPC to panic just yet.
Having recently updated our call for the BoE to hike by a final 25bp in May, we still think the signs most likely point to a rapid slowing of inflation by June, giving the BoE sufficient confidence to hold rates constant for the rest of the year.
As far as markets are concerned, they appear to have largely ignored this morning’s release, with the tone already set by the publication of retail sales data earlier in the day. The upside surprise in the PMIs was insufficient to offset a disappointing -0.9% decline in sales, leaving the pound to trade around -0.5% lower on the day alongside a slip in front-end Gilt yields.
Authors:
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst