Latest PMI suggests another rate rise is no longer a certainty – EY ITEM Club comments

• August’s flash composite Purchasing Managers’ Index (PMI) indicated a fall in private sector activity, ending a run of six successive months of expansion. In practice, the EY ITEM Club doesn’t think the economy is quite as weak as the PMI suggests, although a continuation of the sluggish growth of recent quarters is likely for the near future.
• As well as softer activity, August’s S&P Global/CIPS survey also pointed to inflationary pressures continuing to ease markedly, particularly for manufacturers. These developments mean a rise in interest rates in September is no longer looking so certain. And they reinforce the EY ITEM Club’s expectation that a rate rise next month, if it happens, will be the last in the current cycle.   

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “August’s flash PMI disappointed, with a fall to 47.9 from 50.8 in July leaving the index below the 50 ‘no-change’ mark for the first time since January 2023. The flash services PMI of 48.7 was below the neutral level for only the second time in 31 months, and a fall in the manufacturing output index to 43.3 signalled a deepening contraction among ‘the makers’.

“Based on past form, the latest S&P Global/CIPS survey is consistent with GDP shrinking in Q3. The EY ITEM Club thinks the outlook for the economy isn’t quite that weak. The PMIs exclude the public sector, where output should be supported by the resolution of some pay disputes. Evidence suggests that the PMI survey can be influenced by the sentiment of respondents, as well as actual movements in output, a factor which may be at play this time, given a recent run of downbeat headlines about rising mortgage rates. And the economy will get a boost in Q3 from a return to a normal complement of working days and lower energy bills. That said, a continuation of the sluggish growth of recent quarters is likely for the near future

“August’s survey showed slower activity accompanied by a further easing in cost and prices pressures. Although wages continued to rise, the survey’s measures of input and output price inflation both slowed to the weakest since February 2021. Notably, manufacturers reported the most significant fall in their purchase prices since January 2016.

“This combination of a slowdown in both activity and inflation should give the Bank of England food for thought in advance of its next interest rate decision in September and suggests an increase is no longer a certainty. On balance, the EY ITEM Club thinks the latest survey findings may not be enough to deter the Bank of England from raising interest rates again, given recent developments in pay and services inflation. But they do reinforce the EY ITEM Club’s expectation that a rate rise next month, if it happens, will likely be the last in the current cycle.”