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U.K. Economy "Running on Empty" as Manufacturing PMI Falls More Than Expected

·3-min read

By Geoffrey Smith

Investing.com -- U.K. manufacturing activity is slowing more sharply than expected as persistent price pressures take their toll on manufacturers and service companies alike, according to a closely-watched business survey published on Thursday.

However, the larger services sector held up better than expected, thanks to what S&P called "a sustained recovery in events and other areas of face-to-face consumer spending."

S&P Global's manufacturing purchasing managers index fell to 53.4 from 54.6 in June, according to preliminary estimates. While that still signifies expansion, it's the lowest reading since February 2021 and below forecasts for a 53.7 reading. The services PMI meanwhile stayed unchanged from May at 53.4.

“The economy is starting to look like it is running on empty," said Chris Williamson, chief business economist at S&P Global. "Current business growth is being supported by orders placed in prior months as companies report a near-stalling of demand. Manufacturers in particular are struggling with falling orders, especially for exports, and the service sector is already seeing signs of the recent growth spurt from pent-up pandemic demand move into reverse amid the rising cost of living."

S&P noted that the business expectations index, one of the big sub-indexes that feed into the PMI, fell by 4.6 points in June, which was the largest monthly decline since the start of the pandemic.

“Optimism at U.K. private sector companies has declined in each month since February and is now the lowest for just over two years,” S&P said in its summary of the report.

The report corroborates the Confederation of British Industry’s latest industrial trends survey, which similarly showed a clear slowdown in activity with falling orders and a return to normal of inventory levels, which had run at unusually low levels for over a year due to supply chain difficulties caused by the pandemic.

Even so, the resilience of services, which account for over two-thirds of gross domestic product, was enough to lift sterling off its intra-day lows. By 5:25 AM ET (0925 GMT), the pound was at $1.2216, down 0.4% against the dollar but up half a cent from before the report's publication.

Gabriella Dickens, senior U.K. economist with Pantheon Macroeconomics, said however that the index readings - which are often seen as a real-time snapshot of economic growth - are probably exaggerating the economy's strength. She forecasts a 0.7% decline in gross domestic product in the current quarter, with 0.3% of that alone coming from the extended holiday for Queen Elizabeth's platinum jubilee. She noted that survey respondents often base their answers on turnover rather than sales volumes. The high current rate of inflation thus creates an illusion of growth when demand has actually stopped growing.

One bright spot. she pointed out, was that "with demand for goods faltering, the restocking cycle over and supply chains improving, we expect to see producer output price inflation fall sharply over the coming months."

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