• Services PMI 47.9 vs 51.7 expected
• Prior 52.7
• Manufacturing PMI 53.7 vs 53.0 expected
• Prior 53.7
• Composite PMI 48.5 vs 51.6 expected
• Prior 52.6

Ouch. That’s a big miss on the services print as business activity there falls to the lowest in 64 months. That’s leading UK economic activity to contract in May, with the composite print being the weakest in 13 months.

Service firms signaled the sharpest decline in business activity since January 2021 citing greater economic hesitancy and weaker investment sentiment among clients, alongside delayed consumer spending decisions in response to the Middle East conflict. Aside from the Covid pandemic, the latest reading was the lowest for nearly a decade (July 2016).

As for the stronger manufacturing print, it’s mostly due to frontloading as a temporary demand pick up was noted to beat price hikes and potential supply disruptions. So, the underlying negative impact from the Middle East conflict runs much deeper.

On the prices front, input price inflation did ease slightly since April but remained well above its long-run average. Meanwhile, prices charged by UK private sector firms continued to rise sharply although at a slightly slower pace than the 39-month high seen in April.

Trouble, trouble. S&P Global notes that:

“The UK economy is facing a perfect storm, as rising political uncertainty adds to the growing impact from the war in the Middle East. Businesses are reporting falling output, surging inflation, supply shortages and job cuts in May.

“The May PMI data indicate that the economy contracted at a 0.2% quarterly rate, representing a marked contrast to the robust growth seen earlier in the year. The blame lies first and foremost with the war in the Middle East, though companies are also noting that domestic politics are taking an increasing toll, driving uncertainty higher, in turn deterring spending, hiring and investment.

“Things could well get worse in the coming months, as we have been seeing some support to manufacturing from precautionary stock building which will inevitably fade once warehouses are full.

“Just as the economy shows signs of sinking into decline, prices are surging higher to herald a marked upturn in inflation in the months ahead as these costs pass through to consumers.

“This combination of a faltering economy and spiking price pressures leaves the Bank of England in a major quandary, facing the growing need to hike rates to help contain inflation but thereby adding to recession risks.”

This article was written by Justin Low at investinglive.com.