UK PMI survey: Outsized rebound raises more questions than answers - RBS

Ross Walker, Research Analyst at RBS, notes that the UK manufacturing PMI rebounded much more than expected, rising to 53.3 in August from 48.3 in July.

Key Quotes

“This was the highest outturn since October 2015 and was way above City forecasts: Bloomberg consensus & RBS: 49.0, City forecast range: 47.7 to 50.5.

The rise in August was broad-based among the most important subcomponents, led by output and new orders (the exception was the delivery times index which was little altered). The prices balances also rose sharply – this is probably the most plausible feature of this survey as sterling’s slump fuels import price inflation and, seemingly, some expectation by manufacturers that cost increases will be passed on in higher factory gate prices imminently. To the extent that we trust these data, this suggests risks of a faster pass through of import cost price pressures – but it is too soon to draw any definitive conclusions on this.

On the theme of the exchange rate, interestingly the rise in the PMI in August was not obviously driven by a boost to export orders (presumably stemming from the weaker pound). The export orders index did rise, but by less than the overall orders index or the overall PMI, leaving the level of the export orders and total orders indices closely aligned.

Needless to say, August’s PMI index cannot be taken literally as a gauge of manufacturing production. The PMI output sub-index, at 57.0, is at levels which historically have been consistent with manufacturing output growing at an annualised rate of 3.03.5% . . . This is unlikely to say the least – trend growth in the sector is around 0.5% a year. Does anyone seriously believe that manufacturing is expanding more rapidly in the UK than in the US?

The explanation for the surge in the PMI in August is probably much more prosaic: it is, in all likelihood, simply a reflection of a relatively large number of respondents detecting a probably marginal improvement vs a month ago – that is, the wider environment looks a tad less forbidding than it did in the immediate aftermath of the Brexit vote shock. In this sense, August’s PMI survey changes little in terms of the fundamental, medium-term prospects for  the UK economy.

Perhaps the most relevant feature of the August PMI survey is that it has rebounded to levels above those prevailing ahead of the June 23 referendum – in contrast to most other UK surveys which show a clear deterioration (albeit these moves have typically not been linear). So it may well support notions that any damage to the UK economy since the referendum vote is, thus far, minimal. We won’t get a cleaner read on this for another few months until the data settle down (probably to below 50 in our view).

Of course, neither the wider UK economy, nor its manufacturing sector, was ever likely to experience an immediate collapse in the aftermath of the Brexit vote. The economic risks stemming from EU withdrawal pertain most immediately to the capex cycle. The risks are probably best depicted as a slow burn, protracted period (a year or two) of sub-trend GDP growth rather than a 2009 financial crisis style abrupt downturn.”