‘Entering stagflation’: Economists respond to UK PMIs

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The latest PMI surveys on the state of the UK economy are in, and while businesses are still reporting growth, signs of a slowdown are mounting, with the manufacturing and services indices both disappointing in February.

Markets reacted negatively to the news, sending the pound to its weakest level against the dollar in more than a month; here’s what economists are saying:

Pantheon’s Samuel Tombs predicted an even sharper slowdown as prices rise over the next few months:

The decline in the services PMI to a five-month low in February is the clearest sign yet that the UK now is enduring stagflation.

The business activity index is consistent with quarter-on-quarter growth in output in the non-distribution private services sector slowing to around 0.2 per cent in Q1 from 0.7 per cent in Q4. Granted, the PMI often is influenced excessively by sentiment and it was far too downbeat immediately after the referendum. But the recent rally in equity prices should have boosted corporate confidence.

Analysts at Barclays highlighted that, while firms still reported growth in February, the service sector has fallen below its long-term average while the manufacturing sector appears to have reached “a plateau”. They said:

Even though at face value PMIs remain above the 50 mark, they have dipped below their long-term average in the service sectors meaning that businesses are less confident today than on average over the cycle. With worries crystallising around higher operating costs and possible softening of domestic demand, we believe conditions are in place for further slippages in future months. This is also reflected in a further downgrade of consumer confidence in February, driven by a faltering assessment regarding personal finance.

Howard Archer, chief UK and European economist at IHS Markit, also reckons an economic slowdown is likely after recent data suggested similarly negative outlook for retailers:

Services have been a key UK growth driver along with consumer spending – and there are clear indications that both are now losing momentum.

Looking ahead, we suspect that consumer services activity will be increasingly pressurised by consumers’ purchasing power weakening over the coming months as inflation rises appreciably and earnings growth is muted. This is likely to cause some consumers to cut back on their discretionary spending, including on services.

However, Capital Economics economist Paul Hollingsworth remained relatively upbeat.

He said “the economy faces a number of headwinds including higher inflation and uncertainty surrounding the future relationship with the EU as formal negotiations get underway”, but added “we continue to think that the UK will weather these well”.

Julien Lafargue at JPMorgan Private Bank, also pointed toward the possibility of stagflation, which he said will complicate matters for the Bank of England:

While activity levels remain healthy, this relative slowdown may be the first indication that the post-referendum tailwinds, chief among which a weaker pound, are turning into headwinds for the UK’s economy. We would expect this trend to continue as high inflation pressures make their way to the consumers. This makes the Bank Of England’s next move more difficult as it faces a double challenge of high inflation and decelerating economic growth.

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