UK PMI Shows Inflation Pressures at 16 Month Low but Uncertainty Hinders Employment

The UK manufacturing and service sectors contracted for a fifth month in December S&P Global flash PMI indices show. We continue to see mostly milder contractions but ongoing contractions, nonetheless. British companies cut staff for the first time since the COVID lockdowns of early-2021 with excess operating capacity developing relative to order book growth. Supplier delivery delays indicated the imbalance of supply and demand seen during the height of the COVID-19 crisis is now reversing. This shift saw Inflationary pressures ease to the lowest for sixteen months.

Europe Manufacturing Map

UK Manufacturing and Services PMI December 2022 

  • UK S&P Global/CIPS Manufacturing PMI Dec P: 44.7 (est 46.5; prev 46.5)
  • UK S&P Global/CIPS Composite PMI Dec P: 50.0 (est 48.5; prev 48.8)
  • UK S&P Global/CIPS Services PMI Dec P: 49.0 (est 48.0; prev 48.2)

The manufacturing rate of decline accelerated to the fastest seen since the global financial crisis with just four monthly exceptions. Both new orders and export orders fell especially sharply, though the export downturn showed some signs of moderating. Factories nevertheless shed workers at an increased rate.

Looking in more detail by sector, only the food and drink producing sector reported any increase in demand in December, while the steepest downturns are being seen in basic materials, chemicals & plastics and timber industries, often reflecting destocking by customers. Note that both input buying and inventories of inputs fell in December at marked and increased rates, despite supplier delivery delays easing during the month. Supplier delays were the least widespread since January 2020, just prior to the onset of the pandemic in the UK.

Business activity and new orders fell at reduced rates, with business confidence in the outlook also reviving further. There was positive news on firms’ expectations of output in the year ahead, with future sentiment recovering further from the 13-year low seen in October in the aftermath of the “mini-Budget”. 

PMI indicators backlogs of work gives a bleaker picture. This indicator measures the number of orders that companies have yet to work through and as such provides a reliable indicator of future operating capacity needs. It fell sharply in December in the steepest decline since 2012 barring only the early-2020 pandemic lockdowns and the Brexit vote in 2016.

Falling backlogs of work are causing companies to start reducing payroll numbers, with December seeing the first, marginal decline in employment recorded since the lockdowns of early-2021.

Inflation pressures at 16-month low

While signs of lower inflation may be helping to restore some business confidence, further interest rate hikes by the Bank of England represent a gathering headwind to the near-term economic outlook.

Although average input costs paid by manufacturers and service providers continued to rise at an elevated rate in December, the rate of increase fell to the lowest since May 2021. The easing in cost pressures adds further evidence of a sharp moderation in upward cost increases from a peak back in May. Growth rates cooled markedly in both manufacturing and services.

Slower cost inflation allowed for some pull-back in selling price inflation. Average prices charged for goods and services also continued to rise steeply, but the rate of increase was the lowest for 16 months.

While the sustained elevated levels of the PMI price indices hint at inflation remaining well above the Bank of England’s 2% target as we head into the new year, the survey data add to evidence that consumer price inflation has peaked (the rate fell from 11.1% to 10.7% in November) and is likely to moderate significantly in the coming months.

Eurozone, France and Germany

The eurozone downturn extended into its sixth successive month in December, according to flash PMI data, though the rate of decline of business activity moderated for a second month running amid a reduced rate of loss of orders, improving supply conditions, lower price pressures and an uplift in business confidence.

Within the euro area, the fall in output was also broad-based by region but only France saw a deepening downturn.

However, the overall level of business sentiment remains subdued by historical standards, reflecting the challenging environment caused by the high cost of living, rising interest rates, concerns over energy supply and the Ukraine war. Companies reported only a modest increase in payroll numbers again as a result, underscoring the cautious mood that prevails.

Comments on Europe

Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“While the further fall in business activity in December signals a strong possibility of recession, the survey also hints that any downturn will be milder than thought likely a few months ago. The data for the fourth quarter are consistent with GDP contracting at a quarterly rate of just less than 0.2%, and forward-looking indicators are currently boding well for the rate of decline to ease further in the first quarter.

“The manufacturing downturn has moderated especially markedly in December, led by Germany and linked to a combination of improving supply conditions and reduced fears of energy constraints. The service sector malaise has also calmed, in part driven by signs of reduced fears over the cost-of-living squeeze and, in the financial service sector, reduced concerns over the tightening of financial conditions.

“The outlook for inflation is especially encouraging, with supply chains now improving for the first time since the pandemic began and firms’ costs growing at a sharply reduced rate, feeding through to lower rates of increase for prices charged for both goods and services.

“The downside is that this improving inflation outlook is primarily a symptom of falling demand, which has removed pricing power from many companies and their suppliers, and the business environment remains one in which confidence remains very subdued by historical standards. Thus, while the downturn is looking likely to be less steep this winter than previously anticipated by many, there remain few signs of any meaningful return to growth evident as 2022 comes to an end.”

About the Report

The Global Report on Manufacturing is compiled by IHS Markit based on the results of surveys covering over 13,500 purchasing executives in over 40 countries. Together these countries account for an estimated 98% of global manufacturing output2 . Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

Source: IHS Markit Procure

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