News & analysis

November’s flash PMIs once again support our view that the UK economy is merely in a state of stagnation as opposed to outright contraction, like that seen in the eurozone.

In conjunction with structural supply issues which should keep short-term UK rates higher for longer relative to the eurozone, we expect the UK’s better relative growth prospects to support renewed upside in GBPEUR. This has broadly been on display this morning, with the cross rallying two tenths of a percent as the PMI reports show diverging economic momentum and more credible inflation pressures in the UK, leading UK-eurozone rate spreads to widen.

At 50.1, the UK composite PMI has broken back above the no-change level for the first time in three months. The improvement in growth conditions was largely due to improved service sector activity. Here, firms reported a tentative revival in business activity, although some consumer-oriented companies did report falling business activity due to reduced discretionary spending and cost-of-living pressures. While a major caveat should be applied to extrapolating this improved rate of economic activity over the next few months seeing as services activity was also supported by one of the strongest depletions of order backlogs, we are cautiously optimistic that services activity will continue to hold up as household real incomes steadily improve.

That said, we can’t say with any conviction that recession risks in the UK have materially receded, especially as the pace of new orders continued to slow for a fifth month running.

While the pickup in growth indications is welcome, signs that inflation is looking rather sticky will not be. It was notable that the October flash PMI report highlighted an increased willingness for firms to pass on rising wage costs to consumers, having previously signalled the opposite in light of weakening demand conditions. Though at the time a one-off anecdote could be written off as just that.

But with a similar note appearing in this month’s report too, commenting that service providers are reporting the sharpest rise in their average charges since July and with these overwhelmingly linked to higher staff costs, this is likely to worry some at the BoE.

Indeed, with the report closely read on Threadneedle street, indications of stronger pass through from wages to price growth will be a major concern, particularly given wage growth remains elevated with average weekly earnings running at 7.9% 3m/YoY in September and only just off the recent peak.

These concerns will only be exacerbated by the fact that services employment marginally rose in November, ending a two-month period of reported job shedding by firms that wasn’t reflected in the original payrolls figures. As such, it is likely that November’s employment data is likely to show increased job gains, further supporting our view that growth is likely to remain stable at low levels and rates restrictive to prevent this reaccelerating inflation.

This confirms our view that the BoE is unlikely to cut rates until H2 2024, an outcome that should be positive for sterling, especially against the euro, in the medium-term conditional the UK economy avoids recession.

GBPEUR climbs off of its recent lows following this morning’s PMIs as rate spreads widen in favour of the pound 



Simon Harvey, Head of FX Analysis


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