Latest PMI Survey Points to Economic Downturn

22

July 2016
Economy

Latest PMI Survey Points to Economic Downturn

The latest Markit/CIPS PMI survey looks to spell bad news for the UK economy, signalling the sharpest drop in activity since early 2009.

This Markit/CIPS survey, which tracks movement in the manufacturing and services sectors, assessed the impact of the EU referendum on the UK economy, showing a drop from mild growth in early June to a contraction in July.

The Purchasing Managers Index (PM) for the manufacturing sector was at 49.1, and for services was at 47.4 in July. Both of these are down from June’s figures of 52.1 and 52.3 respectively, showing that services saw the biggest drop. The headline composite output index, combining performance from the two sectors, was at 47.7.

Any figure under 50 in the PMI represents economic contraction rather than growth, and the headline figure of 47.7 is the “lowest reading since April 2009” just after the financial crash.

Not only was the raw figure low, but the month by month change of 4.7 in the composite output index was the lowest on record.

The report said: “The UK economy opened the third quarter on a

weak footing. Output and new orders both fell for the first time since the end of 2012, while service providers’ optimism about the coming 12 months slumped to a seven-and-a-half year low.”

Chris Williams, Markit chief economist, said: “July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early-2009.

“The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most

commonly attributed in one way or another to ‘Brexit’.”

He said that, based on this data, “the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course depends on whether we see further deterioration in August.

It is expected that this latest report will put more pressure on the Bank of England to implement the various economic stimuli that they have been discussing in recent weeks, including a cut to interest rates.

Williamson explained: “With policymakers waiting to see hard data on the state of the economy before considering more stimulus, the slump in the PMI will provide a powerful argument for swift action.”

He did, as others before him have, concede that “the true extent of the impact of this uncertainty still remains to be seen” but that for now, it doesn’t look particularly good, especially given that optimism in the services industry is at this seven year low.

The importance of the PMI survey to economists and markets generally was demonstrated by the sharp drop in the pound against the dollar immediately following the survey’s release.

Various economists have pointed at the survey as a sign that a recession of some form (most likely “shallow and prolonged” according to the Bank of England) is on its way, although some are arguing that, as with the other signs of economic trouble since the referendum, it is still too early to tell.

Barclay’s economist Andrezj Szczepaniak said that the data shown by Markit is “consistent with an imminent recession”, while Investec’s Chris Hare said that it is unclear as of yet whether it is that or whether it represents a post-referendum “knee jerk bout of panic” based on uncertainty.

The Bank of England’s next Monetary Policy Committee meeting in August will be a telling one in this respect, with many expecting the announcement of the chosen fiscal stimuli, and of cut to the base rate.