Today sees the release of August data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by Markit – pointed to a rise in activity following the previous month’s decline. That said, new orders decreased for the second successive month. The rate of input cost inflation accelerated to the fastest since November 2011 and firms also raised their output prices at a sharper pace.
According to the PMI surveys, the UK economy has witnessed something of a ‘V-shaped recovery’ over the last three months. Business activity dropped in July, following the UK vote to leave the EU in late-June, before rebounding in August. Northern Ireland’s private sector performance has followed a similar pattern, albeit the rebound has been much weaker.
Local firms reported a return to growth in activity in August but it was still the weakest rate experienced this year, and well below the pre-downturn long-term average. Furthermore, Northern Ireland’s private sector did not experience the recovery in new orders last month that occurred in the rest of the UK. Order books amongst local firms shrank for the second successive month. This is due to subdued domestic demand, as export orders increased; no doubt boosted by the fall in sterling.
While the headlines may focus on a return to growth and ongoing job creation, these cannot conceal the notable weaknesses that lie beneath. In particular, the two growing concerns are the surge in inflationary pressures and stagnation within the local services sector. Last month, service sector firms reported their first fall in staffing levels in 39 months. With orders contracting for the last two months there is no sign that activity will improve anytime soon. It is a similar story for construction firms, which reported their fifth successive month of falling orders in August.
Overall, the rebound in private sector activity is largely due to the manufacturing and retail sectors. Indeed, the former recorded the fastest rate of growth in output and new orders last month of all the sectors. Meanwhile the fastest rates of employment growth remain within the retail sector. Clearly the manufacturing and retail sectors (cross-border shopping / tourism) are benefiting from the marked depreciation in sterling that has occurred in recent months. This has enhanced price competitiveness and boosted demand from outside the UK.
However, the weakness in sterling is a double-edged sword. Inflationary pressures are accelerating, with input costs rising last month at their fastest rate since November 2011. Input cost inflation amongst retailers and manufacturers reached 54-month and 64-month highs respectively in August. Manufacturers and retailers have responded by raising the prices of their goods. Indeed, manufacturing firms increased their prices at the fastest rate since the survey began. The full effects of this inflationary pressure depend in part on the firms’ ability and appetite to absorb higher import costs. Consumers be warned – price rises and a squeeze on disposable incomes is already in the pipeline. This will hit consumer spending and economic growth in the months ahead.
Overall, the survey is a monthly story of recovery. But this shouldn’t mask the underlying weaknesses that need addressed in the longer-term. The Chancellor has spoken about the need for stimulus at a UK-level. Such a move would be particularly welcomed in Northern Ireland.”
The main findings of the August survey were as follows:
- The Business Activity Index moved back above the 50.0 no-change mark during August, posting 50.8 from 48.0 in July
- While output returned to growth, new order levels continued to fall, albeit at a weaker pace than in July
- Northern Ireland companies took on extra staff again in August, the nineteenth successive month in which that has been the case
- The rate of job creation eased for the second month running as some respondents mentioned not replacing departing staff
- Service providers recorded a fall in employment for the first time in 39 months.
- Rates of inflation of both input costs and output prices accelerated during August
- The rise in input prices was the fastest since November 2011
- Northern Ireland companies raised their output prices to the greatest extent in 34 months
- The manufacturing sector posted the fastest increase in charges as the rate of inflation quickened to the sharpest since the series began in January 2003
Listen to a podcast about the latest PMI
View the a slide deck of charts in relation to the Northern Ireland, UK, RoI and eurozone PMIs by sector