Economics

Schroders Quickview: Flash UK PMI signals post-referendum slump

Private survey data suggest the UK economy has slumped since the result of the EU referendum was announced, increasing the chances of an interest rate cut in August.

22/07/2016

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Markit has released a one-off set of surveys of its purchasing managers’ indices (PMIs), which suggest that both the manufacturing and the services sectors are now contracting – raising the probability of a recession in coming months.

The macro composite PMI fell from a balance of 52.4 to 47.7, well below the neutral mark of 50 and suggesting a contraction in economic activity. Compared to consensus estimates of 49.0, the result is worse than expected and represents the lowest reading in 87 months.

Within the details, the services PMI fell from 52.3 to 47.4 (88-month low), while the manufacturing PMI fell from 52.1 to 49.1 (41-month low). Both sectors saw a sharp fall in domestic orders, although international orders held up well. Both also signalled sub-50 readings on employment, suggesting job lay-offs to follow.

Interest rate cuts ahead

While this data only represents several weeks of information and there may be a rebound after the initial shock of Brexit, the scale of the decline in activity is alarming. A lack of reliable data on activity prevented the Bank of England from taking action at the last gathering of rate setters; however, this data will likely support the Bank in potentially cutting interest rates for the first time in over seven years on 4 August.

It should also support the government’s view that austerity needs to be put on hold as the economy weathers the economic Brexit storm.  

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.