UK Manufacturing PMI inching back towards the expansionary zone

The data published by IHS Markit / CIPS on 24 January 2020 about the Flash UK Manufacturing PMI has indicated that the manufacturing activity in the country could be heading back to the expansion zone after months of trending in the contraction territory. The index which read 49.8 for the month of January 2020 was ahead of the December 2019 reading of 47.5 and close to the magic figure of 50 which as per the index’s usage manual is the dividing point between the expansionary and the contractionary phases of the economy. Since the publication of the December 2019 general election results, a host of leading economic indicators have started to trend in positive territory leading to the belief that the recessionary conditions prevailing over the past couple of years are finally over and that the economy is finally turning around into a growth phase.

Along with the Flash UK Manufacturing PMI data, IHS Markit / CIPS also published the Flash UK Composite Output Index, the Flash UK Services Business Activity Index and the Flash UK Manufacturing Output Index. The composite Purchasing Managers’ Index (PMI) is defined as a leading indicator of a country’s economic health and is comprised of both of its manufacturing and service sectors. The purpose of the index is to provide information about current business conditions to key decision-makers, analysts and anyone interested to know about the economic conditions in a country. The index’s survey of the manufacturing or the service sector is based on responses from panels of senior purchasing executives of more than 400 companies. The composite index value is a number between 0 and 100. A number over fifty represents expansion compared with the previous month, while a reading below fifty represents a contraction while a reading at fifty indicates no change. The UK Manufacturing PMI is one half of the composite Purchasing Managers’ Index and usually exhibits a higher rate of change that the other half of the composite Purchasing Managers’ Index, the Services Business Activity Index.

The start of the year 2020 has seen a significant change of direction for the private sector economy in the United Kingdom. Business activity has seen the sharpest increase in new work initiation since September 2018, expanding for the first time in five months. The seasonally adjusted Composite Output Index rose to 52.4 in January 2020, from 49.3 in December 2019 based on approximately 85 per cent of the usual monthly replies. These figures are the strongest in one and a half years and signal growth of business activity across the United Kingdom’s private sector economy. The service sector for the period experienced good business activity, and index grew from 50.0 in December 2019 to 52.9 in January 2020, signalling an expansion in the sector. This month also the service sector performed ahead of the Manufacturing sector signalling the relative importance of the sector in the overall United Kingdom economy. It is to be remembered that the Manufacturing sector of the United Kingdom is more inclined towards exports and currently has a shortfall in qualified workforce which, in the short run, would stagnate sectoral growth.

However, hiring has seen a noticeable growth for the second month running in January 2020, with marginal growth seen in both the manufacturing and service sectors while new hiring is supported by a sustained rebound in output growth projections for the next 12 months. Business optimism has reached its highest in the past five years, as is evidenced by the number of economic indicators turning positive. Input price inflation has also accelerated in January 2020 and was the highest in the past four months, underpinned by greater salary payments, rising commodity prices and higher costs for imported materials. The service sector has also reported higher hiring numbers during the period as banks, and other financial institutions registered a growth in mortgages, which is indicative of underlying growth in business activities.

The improvement in both the manufacturing and service indices are indicative that the sentiments in the British economy are finally improving. The passing of the Benn Act in the second half of 2019 and the general elections results of December 2019 are being widely regarded as the reason for this change in sentiments. The business conditions in the United Kingdom have been choppy since 2016 when the country had decided to part ways with the European Union after 47 years. The decision essentially entailed that a lot of business ties that had been built over so many years would break down, resulting in large scale business disruptions. Soon after the decision was made, it was realised that both sides are ill-prepared for the likely consequences of this event. In an attempt to cushion the hard landing, both sides started negotiating several terms and conditions which would make the post-event business activity less disruptive. The process, however, was disproportionately elongated as there was constant bickering among politicians from both sides who wouldn't agree on many of the things. These negotiations, which got the actual process of breaking apart postponed by several months, could not be completed in time and has been left for conclusion after the Brexit day of 31 January 2020.

Meanwhile, gloomy sentiments that the British economy was exhibiting on account of the choppy economic and political climate that it was reeling under, came in for a change. Just the fact that a deal was imminent to prevent disruption of significant business activities and the fact that the Brexit process was finally over was enough for the businesses in the country to start investing in the future. Both businesses and the general public, who have been withholding capital expenditure for long now started to make forward expenditures in anticipation of better economic conditions. An increase in mortgage deals, an increase in house prices and an increase in consumer confidence index are an indication as to what the average British citizen thinks about the future of the country, post-Brexit.

During the period from when the Brexit referendum results were declared in 2016 till the actual event passing on 31 January 2020, the Bank of England has had a very hard time dealing with the negative forces that were threatening to push the British economy into a deep recessionary trend. The bank, which followed a loose monetary policy all through the period to spur economic growth in the economy, reached a point when it felt that reducing the rates further could actually push the country into a liquidity trap and hurt the economy more than helping it. However, as tough as it seemed to turn around the economy with monetary tools, the turnaround actually came with a chain of good news. The bank, which had to decide on 30 January 2020 on its interest rates, decided to keep them unchanged being encouraged by the improving economic fundamentals, while it was widely anticipated that it would decide in favour of a rate cut.

It will take another few months of Manufacturing PMI data to confirm if the British economy is out of the woods. Chris Williamson, the Chief Business Economist for IHS Markit, while commenting on the data stated that the data confirms that the British GDP rose at a quarterly rate of approximately 0.2 per cent in January 2020. It is a welcome sign for the country, which had been suffering the Brexit malaise for too long now.