Flash PMIs: collapsing business confidence in the face of tariffs

It looks like the momentum seen in the economy in Q1 will have evaporated by Q2. The April PMIs gave us the first clear sign of the fallout from the huge increase in uncertainty triggered by the US tariffs policy. Based on these readings another year of stagnation looks inevitable. What’s more, inflation pressures are clearly rising. We still expect the Bank of England (BoE) to cut interest rates three more times this year, but rising inflation would prevent a quicker pace of cuts despite the weak growth outlook.

PMIs painting a bleak picture  

April’s PMIs are the first bit of data we have had since President Trump announced his new tariff regime and they did not make for pretty reading. 

First, the output balance of the composite PMI fell to 48.2 from 52.0. Above 50 implies the economy is growing, below suggests it is contracting. The April data release shows a material slowdown in just the first month after Trump’s new tariff announcements. If that reading were repeated over the whole quarter, we think it would be consistent with a fall anywhere between 0.1% and 0.6% of GDP this quarter. Admittedly, the PMIs tend to overreact to uncertainty and exaggerate the negative effects. We don’t expect the UK to enter recession, but if future readings continue to disappoint then stagnation will be unavoidable. 

What’s more, the composite PMIs new orders balance (47.0 from 48.9), and future output balances (58.3 from 65.9) also dropped. That all suggests the green shoots of growth in Q1 will be cut quickly and the data will continue to look bad for the coming months as firms prepare for the worst. 

Additionally, the new export orders index dropped to 41.3, the only time it has ever been lower was during the pandemic. Firms are clearly seeing a significant slowdown thanks to the uncertainty created by US trade policy. 

More concerningly, the shock has been broad-based. While the manufacturing sector PMI fell to 44.0 from 44.9, it has been sub-fifty since October 2024, as worries about tariffs and low growth elsewhere has hampered the sector. Meanwhile, the services PMI had seen 17 months of positive growth in March before dropping from 52.5 to 48.9 in April. That shows that despite tariffs focusing entirely on goods, the uncertainty created by the prospect of a trade war is dragging on the whole economy. 

If that wasn’t enough to knock the wind out of the economy, rising input (68.1 from 63.7) and output (59.1 from 57.6) composite price balances point towards stagflation, despite the sharp drops in oil prices. Most of that is probably because of the increases in employer NICs and the national living wage coming into force in April causing a spike in input prices. The rise in output prices suggests firms are clearly starting to pass on the cost to customers. Ultimately, if firms pass those increased costs on more aggressively than expected or tariffs cause huge disruption to global supply chains then that could lead to an even bigger increase in inflation than the 3.5% we currently expect. In that scenario the BoE would struggle to justify a faster pace of cuts. 

Strong growth in Q1, but potential cliff edge in Q2

The economy looks set to grow by around 0.5% in Q1, but we know inflation will rise sharply in April and now it looks like growth will collapse too. While we don’t expect a full-blown recession it looks like stagflation ‘light’ is now almost a certainty.

Rising prices and sluggish growth create a nightmarish trade-off for the BoE. On the one hand it will want to cut interest rates to support growth, but if inflation runs well above target, it will be constrained in just how far they can go to support the economy.

Ultimately, we think the rise in inflation will be relatively moderate as we don’t currently expect the UK to retaliate in a significant manner, meaning US tariffs should lean towards being disinflationary.

That should give the BoE space to keep cutting interest rates. We still expect one cut a quarter this year, but the chances of consecutive rate cuts have risen sharply.

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