UK PMI's Paint a Worrying Picture, Push Back BOE Rate Hike Expectations to 2017

UK PMI's Paint a Worrying Picture, Push Back BOE Rate Hike Expectations to 2017

5 May 2016, 14:30
Roberto Jacobs

UK PMI's Paint a Worrying Picture, Push Back BOE Rate Hike Expectations to 2017

UK service sector which is considered the main driver of the UK’s economic growth appears to be slowing down. According to the latest PMI survey data from Markit and CIPS, UK services sector grew at its weakest pace in over three years in April. The PMI index slowed for the third time in the past five months, coming in at 52.3 points, significantly worse than 53.5 points expected and lower than 53.7 in March.

Earlier this week, Markit data showed UK manufacturing activity fell into contraction in April for the first time in three years, while construction activity grew at its slowest pace for nearly three years. The weak PMI surveys follows on from consumer confidence weakening to a 16-month low in April and the CBI reporting lacklustre retail sales. With the services sector making up 79% of UK GDP, today’s print indicates that not only will expectations of growth be lower, but the chance of a 2016 rate hike just fell further.

Beneath the headline figure, the employment component fell to its lowest level in two and a half years, mirroring other data/surveys which suggest that firms are holding back on investment/hiring plans in response to uncertainty surrounding the outcome of the forthcoming EU referendum. Weak PMI surveys suggest the second quarter GDP growth could weaken further compared to the 0.4% expansion seen in the first three months of the year.

"The latest reading is consistent with a near-stalling of economic growth, down to just 0.1% in April. The deterioration in April pushes the surveys into territory which has in the past seen the Bank of England start to worry about the need to revive growth, either by cutting interest rates or non-standard measures such as quantitative easing." notes Chris Williamson, Chief Economist at Markit.

With the services PMI historically having some predictive power for trailing changes in the MPC’s policy sentiment, today’s weaker reading is likely to reinforce MPC caution. Chris Williamson of data firm Markit has confirmed that the Bank has previously eased monetary policy when its PMI readings have been this week. BoE holds its monetary policy meeting on 12th May and considering updated projections in the May Inflation Report, it still seems unlikely to result in a shift in policy.

"Uncertainty over the EU Referendum is clearly taking its toll on activity and with this backdrop, we expect second quarter GDP growth to dip below the already disappointing first quarter print. With such subdued levels of growth, we expect the Bank of England will hold fire on interest rates in next week’s MPC meeting, and for many months thereafter.” said Dean Turner, Economist at UBS Wealth Management.

GBP/USD faded an initial spike and now trades lower at 1.4455 as investors digest the recent series of weaker PMI readings. A major downfall was avoided post-services PMI release as the persistent risk-on rally in equities backed by rebounding oil prices provided some support.  

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