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Our views 21 February 2023

Economic data: The PMIs strike back (against recession risk)

5 min read

It is always sobering when shortly after publishing an outlook piece making the case for modest recessions this year (see The case for modest recessions, February 2023), a set of Purchasing Managers’ Index (PMI) business surveys come along which challenge the idea.

Even more so, there were particularly big upside surprises in the UK and US PMI composite indicators and the UK economy is where my forecasts for activity growth (and those of lots of other forecasters too) are relatively more downbeat. So, is that it? Is it time to write-off the recession calls altogether? I’m not convinced yet.

The February flash PMI business surveys were upbeat, with the composite PMIs generally coming in better than expected. These business survey measures are balance of opinion indicators, built up from responses from businesses to questions – largely about whether things are getting worse or not. Headline/output PMI indicators above 50, you’d generally associate with private sector activity in an expanding economy. With headline indicators in the US, euro area, Japan and the UK now all back above 50 (though only just in the case of the US) the aggregate message these surveys are sending is more positive than I’d have expected.

The business optimism indicators that accompany these PMI surveys also generally improved. In the euro area at least, businesses seem to have been cheered by the perception that the probability of deep recessions has fallen and, in both the euro area and UK, buoyed by signs of peaking/falling inflation. A bit more political stability seems to have helped in the UK too.

Other business surveys are available: This relatively reassuring picture of economic activity is reflected in other business surveys too. In the US, there was a sharp upside surprise in the January services ISM business survey and in the euro area, the European Commission’s services and industrial confidence indicators have both improved a bit. Looking beyond the business surveys, consumer confidence seems to have improved in many major economies too, albeit sometimes from very weak levels.

I have been expecting modest recessions this year, driven by monetary policy tightening; households struggling with the cost of living; and firms holding back on investment in the wake of higher interest rates and costs. These PMIs present a particular challenge to my forecasts for those economies where I’ve been pencilling in negative GDP growth in Q1, namely the UK.

Can we mesh these PMIs with recession? I think so. I’m not quite ready to abandon my call for modest recessions yet:

  • First, monetary policy works with a lag and central banks aren’t done hiking yet.
  • Second, the composite PMIs don’t capture activity in every sector of the economy (activity in the UK retail sector, for example, is especially exposed to the cost-of-living squeeze).
  • Third, the UK economy in particular faces quite a long list of challenges this year (see: The case for modest recessions, February 2023)
  • Fourth, more resilient economic data now suggests that we may end up seeing more monetary tightening than expected too. The US output price PMIs rose, with wages sounding like a key driver. In the UK PMI survey, input price indicators eased, but the prices charged indicators didn’t change much, with many firms apparently commenting on the need to pass on “higher wages, food costs and energy bills.” According to the UK press release, “Many service providers suggested that rising staff salaries had led to a sustained increase in their prices charged”. It was notable too that there was again mention of survey respondents reporting difficulties finding job candidates and “despite higher salaries”.

Shifting balance of risks: This latest business survey data warrants being taken seriously though and at face value at least suggest that recessions pencilled into my forecasts may happen later than I’ve been expecting. On the surface at least they also continue to suggest a reasonable probability that more of the world’s major economies manage to escape recession completely as headline inflation falls.


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