Western Europe May 24, 2022 / 09:40 am UTC

PMI Survey Slump Undermines BoE Hawks’ Resilient Business Contention

By Andrew Wroblewski

A clear weakening in May PMI data UK private sector firms is important in two key ways. Firstly in adds and broadens signs of economic weakness and recession risks hitherto highlighted by record low consumer surveys. Secondly it starts to underline a cornerstone of the hawkish element of the Monetary Policy Committee, namely that rate hikes can continue given business survey resilience. But it also bolsters the more dovish line of thinking with the MPC as signalled by Governor Bailey’s comments yesterday in which he pointed to the emerging slump in incomes as a factor that could rein in inflation of its own accord.

Indeed, Chief Economist Pill last week highlighted resilience in business confidence, citing not just the PMI numbers but also evidence from the Bank’s Decision Maker Panel survey, which may indicate business-to-business pricing power within supply chains still suffering from supply disruptions. Supporting this view, the Banks’ Agents report that a further strengthening of margins is likely, especially in firms that are not directly facing consumer demand.

But the May PMI survey conflict clearly with this assessment. The headline seasonally adjusted flash UK Composite Output Index slumped to 51.8 in May, from 58.2 in April, to signal the slowest rise in business activity since the current phase of recovery began in March 2021.It also pointed to the fastest rise in operating expenses since this index began in January 1998, led by a rapid acceleration in input cost inflation across the service economy. Concerns about squeezed margins and weaker order books resulted in a considerable drop in business expectations for the year ahead, the squeeze painting a markedly different picture to the Bank’s Decision Maker Panel survey. 

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I, Andrew Wroblewski, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.