Press release

3 Aug 2023 London, GB

PMIs suggest output growth is slowing while cost pressures linger – EY ITEM Club comments

The survey also pointed to a rise in input cost inflation, with respondents noting that strong wage growth was continuing to drive cost pressures. However, the survey suggested these pressures aren't being passed onto consumers in full, as businesses respond to weak demand by discounting. So, the prospect of further rate rises after today’s Monetary Policy Committee (MPC) meeting remains touch-and-go.

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James White

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Related topics Growth
  • July's services Purchasing Managers’ Index (PMI) pointed to another slowdown in the pace of UK activity growth. The EY ITEM Club still thinks the economy is likely to grow in Q3 as the drags from various idiosyncratic factors fade. But today's survey evidence of a slowdown in new business volumes suggests that Q3's pickup will be modest.
  • The survey also pointed to a rise in input cost inflation, with respondents noting that strong wage growth was continuing to drive cost pressures. However, the survey suggested these pressures aren't being passed onto consumers in full, as businesses respond to weak demand by discounting. So, the prospect of further rate rises after today’s Monetary Policy Committee (MPC) meeting remains touch-and-go.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “July's final S&P Global/CIPS services survey reported a significant fall in the headline PMI to 51.5 from 53.7 in June. The sector remained in expansionary territory, following a modest rise in new business orders, and this was enough to offset another contraction in July's manufacturing survey. But given the scale of the slowdown in both sectors, the composite PMI fell back to 50.8 from 52.8 last month, and weakness in the survey's forward-looking balances suggest that private sector activity growth may underwhelm in Q3.

“However, the S&P Global/CIPS survey has been a patchy indicator of official output data in recent months. And the PMI is prone to being affected by sentiment, so the weight of recent bad news about rising mortgage rates may have affected the outlook of survey respondents and dragged on the PMI.

“The EY ITEM Club still thinks there's a good chance that Q3 should see a modest rise in GDP given it will be flattered by the comparison with Q2, which had one less working day than normal because of May's extra bank holiday. Secondly, with some public sector industrial disputes now resolved, the large drag on public sector output should fade. Therefore, some revival in Q3 activity is likely.

“Less robust growth in the services sector was not accompanied by an easing in cost pressures. Survey respondents once again reported that strong wage growth emanating from a tight labour market was driving up input cost inflation. However, the survey suggested these pressures aren't being passed onto consumers in full, reflecting discounting by services businesses. So, the prospect of further rate rises after today’s MPC meeting remains touch-and-go.”