UK Economy Surges Back and Employment Increases for First time in Months: March PMIs

- March PMIs stronger than expected
- First upturn in staffing numbers since February
- Service sector leads the rebound

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The UK economy is springing back to life and creating more jobs for the first time since February, according to PMI data for March.

The Manufacturing PMI for March read at 57.9, which is above the 55.0 forecast and 55.1 reported in February. The Services PMI - which covers the largest component of the UK economy - read at 56.8, above the consensus expectation for 51.0 and February's reading of 49.5.

Taking the two together and rebalancing the data to give a better snapshot of the broader economy gives us the Composite PMI which read at 56.6, which is well above 51.1 expected and the 49.6 reported in February.

The IHS/Markit PMI survey is a much-watched indicator of changes and trends in economic activity that offers the most comprehensive timely data to economists.

A reading below 50 represents contraction, a reading above represents expansion.

"The better-than-expected UK PMIs come as firms begin preparations for economic reopening in April and May. This bounceback in activity is likely to drive 4-5% growth in the second quarter," says James Smith, Developed Markets Economist at ING Bank.

The inference is therefore that the economy is rebounding, and is doing so at a pace that is faster than economists and the market expected.

IHS Markit says the rebound in activity was the fastest recorded in seven months, fuelled by a rise in new orders for the first time since September 2020.

Survey respondents attributed to a rebound in sales ahead of easing lockdown measures, alongside stronger consumer confidence and a surge in demand for residential property services.

For the first time since the start of the pandemic, service sector activity (index at 56.8) outpaced manufacturing production growth (55.6).

The survey reveals the government's roadmap for fewer stringency measures in the coming months contributed to the strongest rise in total new work since August 2020.

Service providers noted forward bookings from domestic consumers, while some manufacturers cited advanced orders from hospitality businesses and high-street retailers.

However, exports remain a sore spot for the economy as the survey reveals export sales remained relatively subdued with total new orders from abroad falling for the third month running.

Efforts to rebuild business capacity and respond to rising customer demand contributed to an increase in private sector employment during March.

This finding chimes with official ONS employment data out on Tuesday that showed the UK's unemployment rate actually fell to 5.0% in January, leading some economists to suggest the peak in unemployment might already be in.

The PMI report shows the uptick in employment in March represented the first upturn in staffing numbers since February 2020 and the rate of job creation was the fastest for nearly two years.

"The encouraging readings on future expectations, job creation and new order inflows meanwhile all point to robust economic growth in the second quarter, especially if virus restrictions are lifted further," says Chris Williamson, Chief Business Economist at IHS Markit.

The survey reveals that inflation could rise over coming weeks and months as positive trends for output, new work and staff hiring were accompanied by another round of steep input cost inflation during March.

The latest increase in average cost burdens was the sharpest since February 2017. Private sector companies continued to pass on greater operating expenses to clients, as signalled by an acceleration in the rate of output charge inflation to its highest for over three years in March.

The findings come on the same day the ONS reveals UK inflation was softer than economists were expecting in February, however economists are in agreement that all signs point to higher rates of price increases in the future.

Meanwhile, IHS Markit report expectations of rising sales after the national lockdown, and a boost to sentiment from the successful UK vaccine rollout, contributed to an increase in business optimism to its highest since January 2004.

"Dormant businesses were able to plan again with the imminent lifting of UK restrictions and consumers were securing their place in restaurants and holiday venues. Though international travel is still restricted, as long as the fastest rise in consumer costs for three years and the threat of new lockdowns doesn’t halt further progress, we can see more opportunities opening up in the coming months," says Duncan Brock, Group Director at CIPS, who sponsor the PMI report.

ING's Smith says these latest numbers probably don’t help us too much in pinning down GDP growth figures for the next couple of months as they tell us more firms are seeing improving conditions, but don’t necessarily indicate by 'how much'.

"Nevertheless, it's encouraging and is a reminder that sharply higher growth numbers are on their way," says Smith.