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The UK’s post-pandemic recovery appears to be losing steam, but it's not running out of fuel just yet. The latest PMI data paints a picture of an economy that continues to expand, albeit at a more modest pace than in recent months. However, the mixed signals from this data present a challenge for the Bank of England. While the slowdown might typically argue for a more dovish stance, the persistent growth in employment and the uptick in new business could keep inflationary pressures alive. The central bank must carefully weigh these factors in its upcoming policy decisions. The UK economy appears to be in a transitional phase, with some sectors showing resilience and others facing headwinds. As we navigate through autumn, all eyes will be on whether this is a temporary pause or the beginning of a more prolonged deceleration. The coming months will be crucial in determining whether the UK can maintain its economic momentum or if more significant policy interventions might be necessary.
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Both the UK and Eurozone Flash PMIs, which are a very good indicator of the activity data within an economy, were published this morning. Both economic data sets came in lower than the market consensus. The UK figures fared better than their European counterparts, with the UK composite PMI coming in at 52.9 versus 53.5 expected. GBP/USD sold off initially on the back of the release, however we are currently back towards the pre-release levels. The Eurozone has not been as healthy, with the composite PMI figure falling back into contractionary territory - below 50.0 - to 48.9. Once again Germany is slowing and we feel it is only a matter of time before this slow down filters into the rest of Europe - EUR/USD currently trade back at the 1.1100 level.
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The only consolation for UK Plc is that our European counterparts are having a much rougher ride. Even though the UK may have a softer landing, we are far away from where we need to be for the boom times to return under Labour with the Halloween Budget only a few weeks away.
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The honeymoon period is quickly waning for the new Labour government. Although the economy remains in expansion for now, the threat of stagnation looms large as the rate of growth is beginning to slow, with businesses citing an increasing amount of caution ahead of a potentially painful Budget. This has caused both business and consumer confidence to waver, which could see the economy stagnate going into 2025. A slew of incoming tax hikes to fill in a self-inflicted £22bn "blackhole" is the biggest own goal a government can score for a country that had been poised to lead the G7 in growth this year, and might just trigger the recession they had hoped to avoid. That said, the outlook for services inflation continues to improve as inflation was at its softest since Feb 21. Given the perfect track record of the PMI's inflation metric in predicting the trajectory of services inflation in 2024, this suggests another month-on-month drop and could push the MPC towards its next rate cut.