Press release

24 Jul 2023 London, GB

July's flash PMIs suggest activity is faltering – EY ITEM Club comments

Substantial historical revisions and a downside surprise for borrowing in June have left the public finances looking in a healthier position than previously thought. However, higher interest rates mean borrowing is still likely to be higher than the Office for Budget Responsibility (OBR) expects in the rest of the fiscal year.

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James White

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  • July's flash S&P Global/CIPS survey signalled that UK business activity growth got off to a slow start in Q3. Flatlining new orders and lower business optimism over future output suggest the survey's measure of activity could continue to be subdued in the near-term. That said, recent gloomy headlines about rising mortgage rates may have dragged on the sentiment of survey respondents and exaggerated the slowdown in private sector activity. 
  • July’s survey provided a mixed bag on inflation. Cost and price balances softened, particularly in the manufacturing sector, but services businesses continued to pass on the impact of high pay. On balance, the EY ITEM Club still expects the Monetary Policy Committee (MPC) to tighten policy further at next week's meeting, but the case for doing so is looking less strong. 

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The flash S&P Global/CIPS survey for July reported a composite Purchasing Managers’ Index (PMI) of 50.7, the lowest balance for six months and a significant shift down from June's balance of 52.8. While the gap in sectoral performance remained significant, both the services (51.5 from 53.7) and manufacturing PMIs (45.0 from 46.5) fell substantially. The former was driven by cutbacks in discretionary business and consumer spending, while the manufacturing index was depressed by a significant fall in supplier delivery times.

“The S&P Global/CIPS surveys have been a relatively weak leading indicator of GDP in recent months. GDP was influenced by factors not captured by the surveys in Q2, most notably May's extra bank holiday and the impact of strikes on public sector output. With these distortions set to fade in Q3, the EY ITEM Club expects a modest quarter-on-quarter rebound in the official data. The PMI is also prone to being affected by sentiment, so the weight of recent bad news about rising mortgage rates may have depressed the outlook of survey respondents. 

“There was somewhat better news on the inflation front. Manufacturers reported an outright fall in input costs for the third consecutive month, while factory gate prices also declined. Services businesses again reported that strong pay growth was driving up input costs and then being passed onto consumers, although overall output prices increased at the slowest rate since February 2021. On balance, the EY ITEM Club still expects the MPC to tighten policy further at its meeting next week, but the case for further tightening is getting weaker.”