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Flash May PMIs signal a deceleration in UK growth after a surprisingly strong set of April figures, albeit accompanied by further signals of economic normalisation.
The headline reading eased from 54.1 last month to 52.8 in this latest publication, undershooting consensus expectations of a 54.0 print. Even so, with this latest composite print landing broadly in line with Q1 readings, it leads us to think us to think last month’s strength may have been an outlier, rather than today’s numbers indicating the start of a more worrying trend. Moreover, signs that both input costs and output charges continue to ease are likely to be welcomed on Threadneedle street after yesterday’s inflation data beat expectations.
All told, today’s numbers look indicative of a soft landing to us, a dynamic that should keep the BoE on track to ease in August in line with our longstanding call.
Looking through the details of today’s report, there are several notable standout points. First, services fell from 55.0 in April, to 52.9 in May, also significantly undershooting expectations. Manufacturing output, however, was a bright spot, rising from 49.1 to 51.3. Taken together this points to a more evenly balanced growth profile than has been typical in the past 12 months. Second, forward looking indicators suggest that reasonable growth momentum is set to be maintained. New business volumes rose for the sixth consecutive month in May, albeit at the weakest pace year-to-date, while 12-month business activity forecasts also broadly remained robust even as concerns around monetary policy and general election risks were noted as weighing at the margin. Crucially, this mix of decent growth and business optimism appears to be preventing an unwind in the labour market.
As observed in today’s report, employment levels actually picked up for the fifth straight month, though they did so at a marginal rate and to a lesser extent than that of new business.
That said, the most significant point in today’s report is arguably on inflation dynamics. Last month’s report offered a false steer in this regard, suggesting anecdotally that there was only limited passthrough from April’s National Living Wage rise to prices charged. Yesterday’s April CPI print, in contrast, told a rather different story. At 5.9% YoY, services inflation overshot Bank staff forecasts for a 5.5% print, with this beat largely attributable to strong price growth across wage sensitive components. Today’s figures, however, look more reasonable to us. Specifically, the input price balance fell back sharply to 60.3 in May, down from a NLW inflated reading of 65.3 seen in April. The key piece of data for the MPC though is likely to be the drop in prices charged, now at the lowest level since February 2021.
Crucially, this fall was solely driven by the service sector, where firms highlighted competitive pressures as the main factors preventing them from passing on increased costs.
Admittedly, the MPC could be forgiven for de-emphasizing today’s report considering official price growth figures. More likely however, they will see both last month’s PMIs and the latest round of inflation numbers as a blip, with April price resets, Eaters effects and the NLW all conspiring to distort that one month of data. While we still expect lingering uncertainty around this dynamic to prevent a rate cut in June, if today’s PMIs are correct, then a renewed normalisation in the economy over coming months should keep the BoE on track to cut rates in August.
Author:
Nick Rees, FX Market Analyst