UK manufacturers PMI – Positive outlook

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UK manufacturers PMI – Positive outlook

One of the most closely observed indicators of business activity rebounded this week after a lacklustre report in August. This improvement indicates a positive 12-month outlook by the majority of UK business leaders.

The UK manufacturer’s Purchasing Managers Index (PMI) rose from a revised 53.0 in August to 53.8, exceeding analyst expectations of 52.5. As a rule of thumb, anything above 50 reflects an expansion; in areas such as new orders, production, inventory levels, supplier deliveries and employment.The UK PMI has now indicated ongoing expansion for 26 consecutive months.

An increased PMI in the manufacturing sector for September was welcomed after August’s slowdown, which had raised fears that it was the start of a downward trend. Confidence took a knock when exports slumped to their lowest level in two years. This happened amid global trade tensions preventing UK net exporters benefitting from the relatively weak pound, down 1.25% relative to the dollar and off 0.51% relative to the euro over the month of August. At the same time, input costs continued to rise, pushed up by rising oil prices because of oil markets experiencing supply constraints following a sustained period of global expansion.

UK PMI Manufacturing, Services and Composite

Source: Bloomberg, October 2018

So, what’s changed?

The same pressures impacting UK businesses remain but appear to be receding as the UK’s negotiations with the EU reach a climax. Brexit has been thrashed out at the Conservative Party conference this week and examples of new trade agreements between other countries are discussed in the article above. The easing of trade tensions has fed through to recent confidence data with firms indicating increasing new orders, both domestically and internationally. Recruitment into smaller and medium sized businesses also increased over the month, outweighing headcount reductions in global firms, who are generally impacted by international trade policy concerns.

It is worth reminding our readers that the UK manufacturing sector is no longer the engine of economic growth. It accounts for only around 10% of UK Gross Domestic Product (GDP- the value of all goods and services). The economy here is fuelled by the service sector (c.80% of GDP) thus it is important to put the data into its proper context to assess what is happening. Thankfully, the services sector is also indicating expansion.

Our chart above, shows UK Service PMI dipping ever so slightly in September as many firms held back on investment because of Brexit uncertainty. However, it is above neutral at 53.9 demonstrating continuous expansion and a positive outlook.

Comparing these figures to wider Europe and the US, below, we can see that the UK is well positioned with the headline ‘composite’ figure, which is an amalgam of services and manufacturing, being more optimistic than the US. It is also at the same level as the EU.

PMI Index Per Region

Source: Bloomberg, October 2018

Where does this leave us?

Lower confidence impacts future business activity and ultimately feeds through to GDP. Thus, based on recent readings, third quarter (Q3) GDP figures should be better than expected with confidence remaining robust. Economic expansion for Q3 is now forecast to be 0.50%, putting the UK on track for an annual GDP expansion of 1.30%. This is not rip roaring but solid.

If growth turns out as forecast it will offer reassurance to policy makers at the Bank of England that the blip we experienced at the start of the year is not the beginning of the end, but the start of a new beginning. There is a growing sense that the UK is poised for a strong rebound once decisions are taken in relation to the UK leaving the EU.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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