UK Services Sector Bounces Back from Post-Referendum Slump


September 2016

UK Services Sector Bounces Back from Post-Referendum Slump

The latest Markit/CIPS Services PMI shows the sector recovering strongly after a sharp contraction in the immediate aftermath of the EU referendum.

The headline business activity index was at 52.9 in August, up from July’s figure of 47.4 which was the lowest it’s been since the financial crash of 2008. Not only does August’s reading, being above 50, represent a return to expansion from contraction, but the 5.5 point month by month increase from July is “the largest observed over the 20-year survey history”.

The boost in services output follows on from a similar result in the manufacturing PMI, which went up from 48.3 in July to 53.3 in August - also the sharpest month on month growth ever recorded.

IHS Markit’s chief business economist, Chris Williamson, said that these latest readings serve as a sign that the UK economy appears to have avoided the risk of a recession, at least for the time being.

He said: “A record rise in the services PMI adds to the encouraging news seen in the manufacturing and construction sectors in August to suggest that an imminent recession will be avoided.”

He said, as was the general consensus following the manufacturing PMI, that it is still a little too early to tell whether or not these positive results are a sign of the beginning of a long term positive trend, or simply short term recovery from the sharp drops experienced in July. However, he explained, there are increasing signs that the bulk of the Brexit shock is dissipating, with consumer confidence remaining fairly resilient, and the Bank of England’s recent stimulus package appearing to have its desired effects.

He said: “It remains too early to say whether August’s upturn is a dead cat bounce or the start of a sustained post-shock recovery, but there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate. Many companies are seeing business return to normal either simply by customer confidence rising or a stoic determination to “Buck Brexit” and carry on regardless.”

He also explained that reduced uncertainty with regard to the UK’s political landscape has been reflected in the markets.

Williams warned that, while these latest results are certainly positive, “business confidence is still at one of its lowest levels seen over the past four years”. While the risk of recession

He said: “Many companies remain worried about the outlook and how the economy will fare in the event of Brexit, suggesting that political and economic uncertainty is likely to prevail in coming months.”

Others have also warned against taking this latest PMI report too positively, including Capital Economics’ Scott Bowman, who said that “just as the July survey probably overstated the economy's underlying weakness, the August survey probably overstates its subsequent recovery”.

Nonetheless, it is at the very least a sign of some recovery, and immediately after the PMI release, sterling experienced a jump of 0.6% against the dollar, before a slight drop back down to rest at $1.33.