Underwhelming UK PMIs 'serious headache' for BoE amid 'fragile outlook' for economy

This morning’s underwhelming PMI figures will do nothing to dispel fears over the health of Britain’s economy. Business activity continued to grow in July, albeit only modestly and at a far slower pace than anticipated. Perhaps the biggest red flag in the data is the sharp slowdown in hiring, with firms appearing to lower headcount in response to rising costs associated with the hike to business tax rates and the minimum wage.

While we expect activity to pick in the second half of the year, following a period of effective stagnation in Q2, the outlook remains far from devoid of risk. Rising inflation continues to eat into real incomes, borrowing costs are high and the jobs market is deteriorating rapidly. We fear that the looming threat of further Labour tax hikes in the autumn could also act to dampen investment and consumption decisions.

The fragile outlook for growth and the jobs market presents a serious headache for the Bank of England. The big question is whether the MPC will prioritise jobs or inflation. While a 25 basis points cut remains highly likely in August, we think that fears over the latter will ensure no more than a gradual pace of rate reductions beyond then.