MNI ANALYSIS: UK PMIs Signal Soft End to the Year

By Jamie Satchi

     LONDON (MNI) - October's trio of purchasing managers' indices made for a

modest start to the final quarter of 2018, affirming analysts' expectations of

an immediate moderation in growth after Q3's widely-anticipated pickup.

     The larger-than-expected drop in Monday's IHS Markit services purchasing

managers' index (PMI), down 1.7 points to 52.2, was, in the view of analysts,

consistent with growth as low as 0.1% in Q4 -- equal to Q1's paltry, snow-hit

result.

     The Bank of England anticipates a slightly better 0.3%.

     Such a fall would follow what looks like an outsized rise in Q3. The view

of both the BOE and markets is for a 0.6% expansion in Q3, with a preliminary

reading due Friday. If confirmed, that would be the best since Q4 2016.

     --ONE-OFF FACTORS

     The immediate reversal in Q4, however, suggests it was driven almost

entirely by one-off factors.

     "It seemed likely, however, that Q3 output growth in some sectors had been

boosted somewhat by temporary factors, with construction and manufacturing

having recovered from weakness earlier in the year, and a weather-related boost

to retail output," the November BOE MPC minutes said.

     A "more modest pace" was expected in Q4 on the back of recent readings from

a range of business surveys, the MPC added.

     Growth of 0.6% and 0.1% in Q3 and Q4 respectively, together with expansions

of 0.4% in Q2 and 0.1% in Q1, would mean UK growth would average just 0.3% per

quarter in 2018. The last time average quarterly growth was lower than this was

in 2009 (-0.2%).

     October's declines were by and large attributed to Brexit uncertainty. As

this comes to the boil in the run up to next year's Article 50 deadline, just

137 days away, there is a real possibility that last month's moderations could

extend further.

     But how well can the PMIs be trusted?

     They have been guilty of overstating Brexit effects in the past, most

notably in the immediate aftermath of the referendum vote itself. At the time,

PMI and GfK consumer confidence releases were consistent with quarterly growth

of 0.1%, enough to trigger additional monetary stimulus from the BOE, before

subsequent hard data delivered a much healthier rate of 0.5%.

     --COOLING GLOBAL GROWTH 

     The fact that a cooling of growth momentum has not just been isolated to

the UK, however, suggests the PMI data might be more likely to reflect reality.

A wide range of business sentiment indices across other major advanced economies

have lost steam in recent months, with all citing concerns over global economic

conditions.

     The Eurozone composite PMI dropped to the lowest level in over two years in

October, with Germany's composite index registering its joint-lowest reading in

over two years and Italy's a 59-month low.

     While political factors seem to have influenced the data in both Germany

and Italy, weakening external demand appears to be the main driver of the

moderation.

     A similar phenomenon has been observed in the U.S.

     Declines in the Chicago PMI and the ISM manufacturing index last month

pointed to an easing in factory output, while the softening in the ISM

non-manufacturing index showed the moderation in activity reached beyond the

industrial sector.

     But all three U.S. surveys were further into positive territory from the

neutral 50-mark than their European counterparts, signalling greater underlying

strength.

     Meanwhile, in China, the Caixin-Markit services PMI fell 2.3 points to 50.8

in October - the lowest reading since September 2017. New Chinese business

recorded its first stagnation in a decade with anecdotal evidence across firms

of only modest demand.

     A slight uptick in the manufacturing PMI, up a tenth of a point to 50.1,

meant the overall composite index dropped to a 28-month low of 50.5.

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

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