Newsroom

03 July 2024 | EY ITEM Club comments:

June's lower composite PMI shouldn’t derail an August rate cut

• Though the UK composite Purchasing Managers’ Index (PMI) slipped in June, the EY ITEM Club doesn’t see this as cause for concern. The data can be volatile from month-to-month and the Q2 average was higher than Q1. Still, drags from sectors not covered by the S&P Global surveys are likely to mean that GDP growth is slightly softer in Q2 than it was in Q1.
• The balances for costs and prices remained much higher than their long-run averages, largely reflecting persistently strong wage growth. But with the Monetary Policy Committee (MPC) having signalled a switch of emphasis away from backward-looking indicators of inflation persistence, there was nothing in today's survey that should derail plans for an August rate cut.

Peter Arnold, EY UK Chief Economist, said: “The composite Purchasing Managers’ Index (PMI) fell to 52.3 in June from 53.0 in May. The decline was largely due to weaker activity growth in the services sector, with the PMI declining to 52.1 from 52.9 in May. But both results were much better than the flash readings. And the data can be volatile from month-to-month, so the EY ITEM Club would recommend treating June’s fall with a degree of caution. Indeed, the composite PMI averaged 53.1 in Q2, slightly higher than the Q1 average of 52.9.

“The read across from the composite PMI to GDP has been quite patchy over the past couple of years, partly due to the degree of volatility in sectors that aren't part of the S&P Global survey. The EY ITEM Club expects Q2 to prove a case in point, with GDP growth likely to have softened slightly between Q1 and Q2, reflecting the impact of an early Easter on the retail sector and the disruption to health output from four days of strike action by junior doctors at the end of last month.

“The services survey reported the softest growth in input costs since February 2021, though the balance was still much higher than the long-term average, reflecting still high wage growth. There was also an increase in the pace of output price inflation, albeit May's balance had been the lowest in 37 months. Given that June's minutes signalled a change of tack from the MPC, with less focus on backward looking measures of inflation persistence, such as pay growth and services inflation, and a greater emphasis on how the outlook might evolve, the EY ITEM Club doubts these results will have much bearing on the MPC's thinking. The EY ITEM Club expects the first rate cut to come at next month's meeting.”

01 July 2024 | EY ITEM Club comments:

Manufacturing PMI reports a gradual recovery in activity

• The UK manufacturing Purchasing Managers’ Index (PMI) remained in positive territory for a second successive month in June, though the final results were slightly softer than the flash survey. 
• Shipping disruption pushed up input costs and this was reflected in higher output prices. But official data for core goods inflation is yet to show much impact from higher transport costs and, if this remains the case, it shouldn't prevent interest rate cuts from starting soon.

Peter Arnold, EY UK Chief Economist, said: “The manufacturing Purchasing Managers’ Index (PMI) slipped to 50.9 in June from 51.2 in May, falling 0.5ppts compared with the flash estimate. But a second month of expansion did come on the back of a lengthy slump, and the detail of June’s survey was broadly encouraging. There was another strong month of output growth, with the balance only slightly down on May’s 25-month high, while new orders are now growing on a sustained basis.

“The divergence between the S&P Global survey and the Office for National Statistics (ONS) output data over the past couple of years means these results should be treated with a degree of caution. The ONS reported that manufacturing output rose by 1.1% in 2023, comfortably outperforming the wider economy. But the S&P Global survey reported recessionary conditions in the sector throughout last year, with the PMI and output balances only edging into expansionary territory in the past few months. Therefore, the recent improvement in the S&P Global results may represent the survey belatedly catching up, rather than being a sign that the official data will strengthen further.

“On the costs and prices side, global shipping bottlenecks pushed up transport costs, resulting in the strongest input price inflation since January 2023. And this was reflected in higher output price inflation. The potential for shipping disruption to push up inflation has caused concern at several points in 2024. But so far, the official data for core goods inflation has consistently surprised on the downside. Provided that remains the case, this shouldn’t stop the Monetary Policy Committee (MPC) from cutting interest rates soon.”

01 July 2024 | EY ITEM Club comments:

Mortgage demand remains sensitive to interest rates

• UK mortgage approvals edged down again in May, as higher mortgage rates continued to weigh on demand. But the EY ITEM Club expects mortgage rates to remain broadly stable over the next few months, so approvals should flatten out.
• Net unsecured lending rebounded strongly in May, echoing the volatility in retail sales between April and May. The EY ITEM Club views consumers' appetite for taking on credit as being key to the strength of the recovery in activity in H2 2024. If consumer sentiment improves, the UK could see continued solid household income growth translate into a stronger recovery in spending.

Peter Arnold, EY UK Chief Economist, said: “Mortgage approvals edged down to 59,991 in May, from 60,821 in April. The strong recovery in mortgage demand seen in the early part of the year has petered out of late, in keeping with the rise in quoted mortgage rates over the past few months. Net secured lending also fell to £1.2bn from £2.2bn in April, although that was due to a significant rise in repayments. Gross lending continued to increase, reflecting the pickup in approvals at the start of the year.

“Swap rates have remained broadly stable over the past couple of months, and they should remain close to these levels if – as the EY ITEM Club expects – the Monetary Policy Committee (MPC) begins gradually cutting interest rates from August. This, in turn, points to quoted mortgage rates remaining close to current levels, so the relative stability in mortgage demand should also continue.

“Net unsecured lending rebounded to £1.5bn in May, from April's 28-month low of £0.8bn. This echoed the volatility in retail sales in those months, with April's weakness appearing to be caused by Easter falling earlier than normal this year. Consumers' appetite for taking on credit will likely be key to the strength of the consumer upturn in H2 2024. Over the past year, households have adopted a cautious attitude to saving and borrowing, so solid income growth has only translated into a weak pickup in consumer spending. But recent GfK surveys have suggested that consumers' mood is improving, and if this is the start of a change of mindset then the UK should see demand for credit improve and the recovery in spending accelerate.”

01 July 2024 | EY ITEM Club comments:

Nationwide reports small rise in house prices in June

• Though Nationwide reported a small rise in house prices in June, the bigger picture is one of a relatively flat market.
• The EY ITEM Club thinks that prices and transactions have passed the bottom, reflecting the fall in mortgage rates since last summer and strong wage growth.
• However, poor affordability continues to limit the pool of potential buyers and the scope for mortgage rates to fall back is also limited. Therefore, the EY ITEM Club expects to see a period of relative stability for activity and prices. 

Peter Arnold, EY UK Chief Economist, said: “The Nationwide measure of house prices rose by 0.2% month-on-month in June. But given the degree of month-to-month volatility in the lenders’ house price measures, this effectively means that prices were broadly flat, as they have been since the start of this year.

“The bigger picture is one where the housing market has probably now passed the bottom, both in terms of activity and prices. Though mortgage rates have edged up in recent months, they remain well below the levels seen in both late-2022 and last summer. This, combined with strong growth in nominal wages, has reduced the scale of the mortgage affordability problem, which has helped to entice some buyers back to the market.

“However,  while mortgage affordability is much better than it was last summer, it remains stretched relative to historical norms. And the EY ITEM Club expects mortgage rates to remain broadly stable in the near-term – financial market pricing already builds in the expectation that the Bank of England will cut interest rates, and the scope for them to surprise by cutting more rapidly looks limited. Other affordability metrics, such as loan-to-income and loan-to-value ratios remain high. This is preventing many people from being able to access mortgage finance and limiting the pool of potential buyers.

“The EY ITEM Club thinks that the most likely scenario is that we see a period of relative stability in activity and prices. This would be consistent with the post Global Financial Crisis experience, where prices were broadly flat for three years before a recovery took hold.”

28 June 2024 | EY ITEM Club comments:

National accounts point to a slightly stronger start to 2024

• The UK national accounts reported a slightly stronger rebound at the start of 2024 than earlier estimates had shown. According to the income breakdown, real household income continued to grow at a solid pace, with an increase in the saving ratio in Q1 suggesting consumers remain cautious.
• Rising consumer confidence suggests this picture could soon change. The EY ITEM Club expects sustained real income gains will increasingly translate into stronger consumer spending growth. 

Peter Arnold, EY UK Chief Economist, said: “After a weak end to 2023, the scale of the rebound in activity at the start of this year was upgraded in Q1's national accounts. GDP growth in Q1 was revised up to 0.7% quarter-on-quarter from the previous estimate of 0.6%. Revisions to the expenditure components saw support from consumption and the net trade increase, though this was partly offset by more downbeat assessments of business investment and government consumption.

“The income breakdown indicated that Q1's 0.4% rise in consumer spending was supported by continued strong growth in real household disposable income, which increased 0.7% for the second consecutive quarter. This meant that the household saving ratio rose to 11.1% in Q1 from an already-high 10.2% in Q4 2023.

“Looking ahead, the EY ITEM Club expects GDP to grow at a decent pace in Q2. The composite Purchasing Managers’ Index (PMI) averaged the same level in Q2 as Q1. However, the earlier-than-usual Easter appeared to boost consumer activity in March at the expense of April, while strike action in the healthcare sector in June will likely drag on output this month. Therefore, the EY ITEM Club thinks quarter-on-quarter GDP growth will probably come in a bit softer than Q1's strong rise.

“Further ahead, the EY ITEM Club expects low inflation and persistently strong pay growth to mean real household incomes continue to grow strongly. Provided rising consumer confidence results in households gradually moving away from the cautious sentiment exhibited over the last year, the EY ITEM Club thinks there is a prospect of a decent consumer-led recovery.”

12 June 2024 | EY ITEM Club comments:

GDP on track for solid growth in Q2

• UK GDP was flat in April, as lower output in the manufacturing, construction, and consumer-facing services sectors was offset by broad strength elsewhere in the services sector. Some of the drags on activity in April were driven by one-off factors, which the EY ITEM Club expects will unwind. Looking through this volatility, the EY ITEM Club still thinks GDP is likely to grow at a decent pace in Q2.
• Looking further ahead, rising real incomes and consumer confidence suggest the economic recovery should become more firmly entrenched as the rest of the year progresses. Still, tighter fiscal policy and the lagged passthrough of past interest rate increases will likely mean the UK’s exit from its long period of stagnation will be steady rather than spectacular. 

Peter Arnold, EY UK Chief Economist, said: “GDP was unchanged in April, as the economy consolidated the strong gain made in March. The sector breakdown showed that lower output in the consumer-facing services sector provided the largest drag on activity in April, driven by a significant fall in retail sales and an earlier-than-usual Easter. Elsewhere, manufacturing and construction activity both fell. But this was offset by stronger output elsewhere in the services sector.

“Monthly GDP data can be noisy and the focus placed upon individual outturns should therefore be measured. Indeed, after three strong month-on-month gains, it was always likely that there would be some payback in April, and a flat outturn beat the EY ITEM Club’s expectations. Looking through this volatility, the EY ITEM Club expects GDP to grow at a decent pace in Q2. The drag on some sectors from an early Easter should unwind in May. Moreover, early business survey data has signalled that private sector activity growth remained robust across the first two months of the quarter. However, planned strikes in the healthcare sector at the end of June will likely weigh on activity. On balance, the EY ITEM Club expects quarter-on-quarter GDP growth to be slower in Q2 than in Q1.

“Looking further ahead, the EY ITEM Club thinks rising real household incomes and consumer confidence will be the key drivers of stronger economic growth over the rest of this year and into 2025. However, tighter fiscal policy and the lagged passthrough of past interest rate rises are likely to mean that the UK economy’s exit from its long period of stagnation will be steady rather than spectacular.”

11 June 2024 | EY ITEM Club comments:

Pay growth continues to cool despite national living wage rise

• UK private sector regular pay growth continued to cool in April, despite a large increase in the national living wage that month. At the same time, labour market conditions continued to loosen, albeit to a lesser extent than around the turn of the year.
• April’s large overshoot for services inflation likely took a June interest rate cut off the table. But with pay growth slowing in line with the Bank of England’s expectations and labour market conditions loosening, the EY ITEM Club sees today’s release as being consistent with the Monetary Policy Committee (MPC) cutting rates later in the summer. 

Peter Arnold, EY UK Chief Economist, said: “April's pay data had been eagerly awaited, as it would show the effect of the near-10% increase in the national living wage on whole economy wage growth. In the event, the Bank of England's favoured measure – private sector regular pay growth – cooled to 5.8% in the three months to April, from 5.9% in March. The relatively benign outcome was partly due to large base effects, but the EY ITEM Club also thinks that the impact of the National Living Wage rise was smoothed over the early months of the year and that this likely explains some of the strength in previous months. It is difficult to benchmark the outturn against the Bank of England's expectations, as it only provides quarterly forecasts for this series. But factoring in additional large base effects coming into play in the next couple of months, the April data leaves pay growth on track to meet the Bank of England's Q2 projection.

“On the quantities side, labour market conditions still appear to be loosening, albeit perhaps not as much as previously. A 12,000 fall in vacancies on three months earlier was a much smaller decline than those recorded over the past couple of years, while the decline in HMRC's count of pay-rolled employees in May was also more modest than of late. Workforce jobs bucked the loosening trend, with another large gain in Q1, but this series appears to be an outlier.

“April's large overshoot for services inflation has likely taken a June rate cut off the table. However, with pay growth slowing in line with expectations and labour market conditions loosening, the EY ITEM Club doesn't see anything in today's release that would prevent the MPC from cutting rates later in the summer.”

07 June 2024 | EY ITEM Club comments:

Halifax shows house prices remain broadly flat

• House prices were broadly flat in May, extending the period of relative stability that we’ve seen since the turn of the year. The stabilisation in market conditions reflects the large fall in mortgage rates since last summer, with transactions and prices having decisively passed their trough.
• But the recent rise in mortgage rates is likely to prevent any meaningful pickup in transactions and prices in the short-term. 
• Looking further ahead, the recovery in prices is likely to be slow and steady, given that poor affordability continues to significantly limit the pool of potential buyers and mortgage rates are likely to fall back slowly. 

Peter Arnold, EY UK Chief Economist, said: “The Halifax measure of house prices fell by 0.1% month-on-month in May, after being flat in April. This continued the period of relative stability in house prices observed since the start of this year.

“While 2023 was a challenging year for the housing market, data for the first half of 2024 has suggested that the market has passed the bottom. The substantial fall in mortgage rates since last summer, combined with strong growth in nominal wages, has reduced the scale of the mortgage affordability problem. This has helped to entice some buyers back to the market, leading to a recovery in transactions and putting a floor under prices.

“Over the past couple of months, mortgage rates have edged up again in response to rising swap rates, as financial markets anticipate a slower pace of Bank of England interest rate cuts. This is likely to prevent any meaningful pickup in transactions and prices in the near-term. But so far, the increases have been small and mortgage rates remain well below last summer’s peaks. The EY ITEM Club does not expect to see a renewed downturn in the housing market.

“Further out, the EY ITEM Club expects a slow and steady recovery in house prices. After the Global Financial Crisis, prices were broadly flat for three years before a recovery took hold. Though mortgage affordability is much better than it was last summer, it remains stretched relative to historical norms, and the EY ITEM Club expects only a slow fall in mortgage rates over the next couple of years. Furthermore, it’s not just the affordability of mortgage payments that is limiting the pool of potential buyers. The relatively small fall in house prices over the past couple of years means that both loan-to-income and loan-to-value ratios remain high, preventing many people from being able to access mortgage finance. Tight supply, resulting from very low levels of housebuilding, will provide some offset to subdued demand. But the EY ITEM Club expects a very slow pickup in prices over the next few years.”

06 June 2024 | EY ITEM Club comments:

Construction recovery gathered pace in May

• A two-year high for the construction Purchasing Managers’ Index (PMI) in May suggests the sector is well on the road to recovery. The EY ITEM Club expects to see a solid rebound in construction output in Q2, after Q1 was significantly affected by unusually wet weather.
• The fact that the recent upturn was broad-based across the sub-sectors and built on improving new orders suggests it should have some durability. The belated housing upturn is a lagged response to increasing evidence that housing transactions and prices have passed the bottom. The EY ITEM Club expects this recovery to continue, albeit at a modest pace. 

Peter Arnold, EY UK Chief Economist, said: “The construction Purchasing Managers’ Index (PMI) rose to 54.7 in May from 53.0 in April, reaching its highest level in two years. All the underlying detail of the S&P Global survey was encouraging. Rising activity was driven by stronger growth in new business, while supply-chain conditions continued to improve, and input cost inflation cooled further.

“The construction PMI has been a relatively good leading indicator of the official measure of construction output over the past couple of years. The official series underwhelmed in Q1, largely because of the disruption caused by a prolonged period of wet weather. However, the strength of the recovery in the PMI in April and May suggests that Q2 is likely to see a robust recovery in construction output. This should help to mitigate the impact on GDP of April’s poor retail performance and the planned healthcare sector strikes at the end of this month.

“The strength of the new orders balance suggests the recent construction upturn should have some durability, and the broad-based nature of May’s strength further supports this view. It was the first time since May 2022 that all three sub-sectors – commercial, civil engineering, and housing – reported rising activity. Experience suggests that housebuilding reacts to movements in housing transactions and prices with a lag, so the return to growth of the residential sector is a response to increasing evidence that prices and demand have passed the bottom. The EY ITEM Club expects this recovery to become more firmly entrenched over the coming months, although the pace of the upturn is likely to remain modest.”

05 June 2024 | EY ITEM Club comments:

Weaker services PMI points to less robust activity growth in Q2

• May's final UK services Purchasing Managers’ Index (PMI) signalled a more modest pace of activity growth than in recent months. In combination with April's fall in retail sales and planned healthcare sector strikes in late June, May's lower PMI readings are consistent with the EY ITEM Club’s forecast for slower GDP growth in Q2, following Q1's strong outturn.
• The survey also pointed to lower input cost inflation, as upward pressure from the introduction of the higher national living wage in April unwound in May. Together with evidence of a further slowdown in output prices, this supports the EY ITEM Club’s view that the Office for National Statistics’ (ONS) measure of services inflation will steadily cool through the summer.

Peter Arnold, EY UK Chief Economist, said: “May's final S&P Global survey reported a slower pace of services activity growth than in recent months, with the Purchasing Managers’ Index (PMI) falling to 52.9, from 55.0 in April. Respondents linked the smaller upturn to a softer rise in demand, particularly from overseas customers. But with May's earlier manufacturing survey having reported an increase in production, the fall in the composite PMI was smaller, to 53.0 from 54.1 in April.

“Though still above the 50 'no-change' mark, May's weaker composite PMI reading is consistent with the EY ITEM Club’s view that the UK is set to see a slower pace of quarter-on-quarter GDP growth in Q2. Some of the consumer strength at the end of Q1 may have reflected the earlier-than-normal Easter, so this should have unwound at the start of Q2. Indeed, April's fall in retail sales was consistent with that idea. Additionally, four days of planned junior doctor strike action at the end of June – a factor that won't be captured in business surveys – should weigh on output in the health sector this month. As a result, the EY ITEM Club thinks quarter-on-quarter GDP growth will slow, after Q1's 0.6% increase.

“On the inflation front, May's services survey reported that input costs rose at their slowest pace for three years, after the large national living wage increase had caused a significant rise in labour costs in April. Together with evidence of a further slowdown in prices charged inflation, this is consistent with the idea that services inflation will continue to cool through the summer.”

24 May 2024 | EY ITEM Club comments:

Significant fall in retail sales points to softer GDP growth in Q2

• A surprisingly substantial fall in UK retail sales in April added to the evidence that GDP growth is likely to cool a little in Q2, after Q1's very strong gain. Retail sales data is always volatile, but recent outturns have been exceptionally choppy. The EY ITEM Club expects April's fall to be reversed in May, mirroring the experience of December and January.
• The EY ITEM Club remains cautiously optimistic about the consumer outlook for H2 2024. Wages are growing strongly in real terms, following the significant fall in inflation. And strengthening confidence suggests real income gains should translate into solid spending growth, in contrast to last year.

Peter Arnold, EY UK Chief Economist, said: “Retail sales fell by 2.3% month-on-month in April, following a decline of 0.2% in March (revised down from flat). There were large month-on-month falls in sales in the food, non-food, and fuel categories, with the Office for National Statistics (ONS) blaming poor weather for reducing footfall in stores. Even by the standards of the retail sales data, which is an exceptionally volatile series, recent outturns have been particularly choppy. The early Easter has probably added to the complications this time around. But the EY ITEM Club thinks May should see a strong rebound, mirroring the experience of December and January.

“However, taking a broader sweep, it's clear that the retail sector is still struggling to generate much momentum. And coming on the back of yesterday's softer composite Purchasing Managers’ Index (PMI), it suggests that the UK is likely to see a weaker outturn for GDP growth in Q2, after Q1's very strong performance.

“Still, the EY ITEM Club remains cautiously optimistic about the consumer outlook for H2 2024. Though inflation is proving stickier than previously hoped, it has fallen significantly over the past year and most consumers are enjoying strong real wage gains. That said, the strength of real income growth is being dampened by tighter fiscal policy and, for borrowers refinancing fixed-rate mortgages this year, by the lagged impact of tighter monetary policy. But today's GfK release suggests that consumer confidence is continuing to gradually strengthen, particularly around prospects for personal finances and the economy over the next 12 months. Therefore, in contrast to the past year, the EY ITEM Club thinks there's a good chance that real income gains will translate into solid growth in consumer spending.”

23 May 2024 | EY ITEM Club comments:

Composite PMI falls, but recovery still running at a solid pace

• Though the UK composite Purchasing Managers’ Index (PMI) dropped back in May, it continued to signal a solid pace of activity growth. The UK remains on track to see another decent outturn for GDP growth in Q2, with the recovery becoming more firmly entrenched.
• Much softer cost and price pressures in the services sector provided some pushback to the narrative from yesterday's inflation data. But in terms of the June monetary policy decision, it's likely to be a case of too little too late.

Peter Arnold, EY UK Chief Economist, said: “May's flash S&P Global survey reported a fall in the composite Purchasing Managers’ Index (PMI) to 52.8, from 54.1 in April, taking the balance back to the level seen in March. A fall in the services PMI (to 52.9 from 55.0) was the cause, with growth in new orders cooling. On the flip side, the manufacturing PMI rebounded back into positive territory again (51.3 in May after 49.1 in April).

“The PMIs are often volatile from month-to-month, while the strength of last month's balance did look like an outlier compared with other indicators, so the EY ITEM Club does not see May's softer outturn as being problematic. Indeed, it is consistent with GDP continuing to grow at a solid pace in Q2, and the recovery becoming more firmly entrenched.

“The other interesting development in May's flash survey was the weakness in the costs and prices balances. Input cost inflation was the weakest in seven months, while output prices rose at their slowest pace since February 2021, with the service sector being the source of weakness in both sectors. Following on the back of yesterday's large upside surprise for services inflation, these results offer some cause to hope that the official data will cool in the months ahead. But the chances of a June rate cut look very low after yesterday's data, and softer survey data is unlikely to do much to change that.”