The UK’s Flash manufacturing PMI came in at 48.6 in November, down from 49.9 in October, its lowest level in 9 months. Companies in the private sector reported a slight decline in business activity this month, ending a 12-month sustainability period of expansion. New order growth also slowed to its lowest level in a year, with widespread reports suggesting weak business confidence.
Workforce numbers have been negatively impacted by concerns about business prospects and rising input price inflation. There have been slight declines in private sector employment over the past two months, with respondents indicating that departures have not been replaced voluntarily, offsetting expected increases in salary costs.
The UK’s seasonally adjusted composite PMI came in at 49.9 in November, down from 51.8 in the previous month, the lowest level since October 2023. With the index falling below the neutral 50.0 threshold, the latest reading points to a partial decline in private sector output.
In terms of service providers, their index scored 50.0, demonstrating consistent levels of business activity. On the other hand, manufacturers reported a slight decline in production volumes (49.3), the fastest rate of decline since February. Survey respondents typically commented on weak customer demand, also citing delays in investment decisions and cuts in new projects in response to deteriorating local business conditions and geopolitical uncertainty.
November data indicated that overall new business growth across the private sector economy was the weakest since the current phase of expansion began in December 2023. Service providers mostly cited headwinds caused by weak business confidence and caution among customers in the wake of the autumn budget. Some companies noted that the clarity following the U.S. election had a positive impact on demand.
Lower demand and increased costs affect the manufacturing sector
Manufacturers recorded a strong decline in new business and the rate of contraction accelerated to the fastest rate since February. Lower sales were generally associated with weak global economic conditions, lower capital spending, and intense competition in export markets. Producers of goods in the automotive sector also noted a general decline in demand. Labor backlogs across the private sector economy fell for the nineteenth consecutive month in November.
often reflecting sufficient reserve capacity amid a weaker rate of new business expansion. A combination of weak demand and higher salary costs led to another marginal decline in private sector employment.
Employee declines were recorded in both the manufacturing and services sectors, with the former recording the fastest slowdown in nine months. Private sector companies have widely commented on freezing hiring and avoiding voluntary replacement departures.
The average cost burden increased at a strong and accelerating pace in November. This was driven by the sharpest rise in input prices in the services sector.
Since July. Respondents mostly cited strong salary pressures, along with rising technology costs, food prices and energy bills. Manufacturers also reported higher transportation costs, but some reported successful negotiations with suppliers to pass on low commodity prices.
The manufacturing sector is vital to the British economy, contributing significantly to GDP and employment. The PMI helps assess the performance of the sector, and identify areas of growth or contraction, which can inform investment and policy decisions.
The Bank of England is closely monitoring the PMI as part of its assessment of the economic landscape. A strong PMI may influence decisions on interest rates and monetary policy.
while a weak PMI may lead to a more dovish stance.
How does a strong or weak PMI reading affect the value of the British Pound (GBP)?
A strong or weak manufacturing PMI reading can significantly affect the value of the British pound (GBP) in the following ways:
Strong PMI reading
GBP Valuation: A strong PMI reading (above 50) points to expansion in the manufacturing sector, suggesting strong economic health. This can lead to an appreciation of the value of the pound sterling as traders may buy the currency in anticipation of stronger economic performance.
Positive sentiment: A high PMI can boost overall sentiment in the market, leading to increased confidence among investors. This often leads to increased demand for GBP-denominated assets.
Interest rate expectations: If the PMI indicates sustained growth, it could lead to speculation that the Bank of England may raise interest rates to manage inflation. High interest rates usually attract foreign investment, boosting the value of the pound.
Weak PMI reading
Pound depreciation: Conversely, a weak PMI reading (below 50) points to contraction in the manufacturing sector.
which could lead to a depreciation of the pound as investors may sell the currency in response to concerns about the economic slowdown.
Negative sentiment: A low PMI can create a negative outlook for the economy, reducing investor confidence. This can lead to lower demand for GBP and GBP-denominated assets.
Low interest rate expectations: A weak PMI may lead to expectations that the Bank of England will cut interest rates to stimulate the economy. This could further weaken the pound, as lower prices make the currency less attractive to investors.
Strong PMI readings usually lead to a stronger GBP, while weak readings can cause value to fall. Market participants are closely watching PMI data as part of their broader analysis of economic conditions and monetary policy outlook.
