Service sector growth hit a five year high in November, according to the latest data from IHS Markit /CIPS. The survey highlighted another round of rapid cost inflation, driven by higher fuel prices, wages and utility bills. Prices charged by service providers, also increased at the fastest rate since the survey began in 1985.
It was a similar story in the manufacturing sector. Output increased to a three month high. Production, new orders, employment, stock purchases, all had a positive influence. Output increased for the eighteenth month running. Domestic order flows and stock building boosted output.
Manufacturers faced a "challenging environment" it was said. Stretched supply chains disrupted production schedules. Lead times increased. Cost prices increased to the "greatest extent in the 30 year history" of data collection. Order flows were up, determined by strong domestic market conditions. Export orders books were lower. Weaker demand from China impacted. Disruption to trade with the EU resulted in some cancellation of orders.
Despite fears of a slow down in the economy, we still expect growth of 7.5% this year and around 5.5% growth in 2022. Inflation CPI basis is expected to rise to 5% by the end of the year. CPI goods inflation is already at 4.9%. Manufacturing input costs increased by 13% in November. Output costs were up by 8%. It may get a bit worse before it gets better.
The good news, oil prices have fallen back significantly. Oil closed at $70.39 this week. The inflationary impact of higher prices will ease into the second quarter next year. Gas prices are down by 40% from peak.
Iron ore and lumber prices are down 50%. Aluminum prices down 20%. Copper prices down 10%. Shipping rates to the U..S. West coast from China have fallen back by almost 30% in September, to around $14,500 dollars.
Inflation is always and everywhere a transitory phenomenon. Sometimes it takes a little bit longer to pass through. Inflation levels will ease into 2022 but we expect levels to remain above target, even by the end of next year.
Sterling closed lower against the dollar at $1.3236. This will only increase the short term cost pressure for manufacturing. Our forecasts for domestic demand and growth remain resilient. The prospects for truly global Britain not quite so good. Free trade deals with the rest of the world will open up the domestic market to increased competition.
The latest data suggests no significant shift in the pattern of export trade. UK export performance has been disappointing, despite the rapid recovery in world trade. Imports have increased with a great share now apportioned to non EU participants.
On Friday we released our new "Friday Forward Guidance". This delivers our trilogy of "Friday Forward Guidance", "The Saturday Economist" and "Monday Morning Markets". Club members and Premium subscribers can access the working data sets, including our UK Forecast Pack, on our Flipsnack channel.
Since we pressed send on our Friday missive, Michael Saunders of the MPC has suggested there will be no rate rise in December. No surprise there. When we pressed send on Monday, we warned of Bitcoin vulnerability. Prices hit $44,000 dollars yesterday from the $67,000 dollar peak in November.
Don't miss our Monday Morning Markets update next week. "Markets are madder than ever", warns Charlie Munger, the 97 year old vice chairman of Berkshire Hathaway. "It's now even crazier than the dotcom boom."
As for Cryptocurrencies "I wish they had never been invented". "I just can't stand participating in these insane booms." Don''t even ask Charlie about NFTs ...
IHS Markit/CIPS UK Services PMI® Business Activity Index
IHS Markit/CIPS UK Manufacturing PMI® Business Activity Index
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