UK PMIs 'brutal reality check' for economy amid stagflation concerns

Matthew Ryan, CFA Ebury

Today's dour PMI figures are a brutal reality check for the UK economy. The surge in activity in April was always suspect, as businesses frontloaded orders ahead of anticipated war-driven supply disruptions. This fleeting optimism now looks like nothing more than a dead cat bounce. May's sharp slump in business activity paints a clearer picture - surging energy costs are hollowing out demand, squeezing exports, and straining margins.

Britain's economy is stalling precisely when inflation is set to rise - all the hallmarks of a classic stagflation trap. With the Strait of Hormuz set to remain effectively closed for some time, and the UK jobs market deteriorating fast, the outlook is fairly grim. Compounding the pain is acute political uncertainty, which will only breed further caution at exactly the wrong moment.

Against this backdrop, the case for a Bank of England rate hike in the summer is crumbling. Tightening to combat a supply-driven inflation spike is a dangerous game when the economy is losing momentum, particularly as a weak jobs market should limit second-order effects. Higher borrowing costs won’t reopen shipping lanes, but they will deepen the growth pain.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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