Brexit Fears Hit UK Economy
The UK services Purchasing Managers’ Index (PMI) (released today), along with the manufacturing PMI (released on Monday) and construction PMI (released on Tuesday) reveal that Brexit uncertainty is affecting the state of the UK’s economy.
The Purchasing Managers’ Index (PMI) data published by Markit Economics—a global provider of business surveys—are based on selected companies’ surveys conducted each month and providing an idea of how the private sector economy is doing. PMI data are considered reliable and help to shed more light on aspects of the economy that aren’t covered by official economic statistics. In this sense, “PMI surveys have therefore been designed to provide business decision-makers with up-to-date, accurate and reliable data on which to benchmark performance and base business strategy.”
UK Manufacturing PMI for June
Released on Monday, the latest figures from IHS Markit on the UK’s manufacturing sector showed that manufacturing activity was slowing down. The manufacturing PMI posted its lowest reading in three months at 54.3 in June, with growth rates of output and new orders being slow. According to the survey, “Alongside reports of a deceleration in the rate of expansion of new orders from the domestic market, manufacturers also noted that new export business rose at a weaker pace.” Senior economist at IHS Markit, Rob Dobson, said that “The UK manufacturing sector largely weathered the uncertainty of a general election and start of formal Brexit negotiations to eke out further output growth at the end of the second quarter. However, the rate of expansion eased again in June, with growth weakening across the consumer, intermediate and investment goods industries.” He explained that the main factor of the weak June data “was a steep easing in the rate of increase in new order intakes.” New business was slow, especially in the domestic market where uncertainty led to delays in new contracts. Dobson added: “While the survey data add to signs that the economy is likely to have shown stronger growth in the second quarter, further doubts are raised as to whether this performance can be sustained into the second half of the year.”
Duncan Brock of Customer Relationships at the Chartered Institute of Procurement & Supply, also stressed that manufacturing slowed down as a result of the election and the start of the Brexit talks. New orders were limited due to reserved feelings about entering new projects which might be troubling since the domestic market has been the driver of economic growth in the last two months. He pointed out that optimism was high, despite the generalised feeling of uncertainty which remains the “main enemy.”
UK Construction PMI for June
The June data showed weaker growth across the construction sector as business activity, new work and employment expanded at slower paces than those in May. Again, political uncertainty and the economic outlook were significant factors that defined clients’ opinion, who remained hesitant and reserved, seeking to avoid risks. Many firms referred to delays “in decision making among clients, partly linked to heightened economic uncertainty.” Construction companies were pessimistic about their future growth and reported an increase in their costs since inflation was higher and Sterling weaker.
Senior Economist at IHS Markit, Tim Moor, said that the construction sector was slowing down as a result of limited commercial building and civil engineering activity. He laid emphasis on clients’ renewed caution because of political and economic uncertainty. Moor said: “Fragile business sentiment led to delayed decision-making on large projects and greater concern about the outlook for workloads during the next 12 months. While construction firms remain upbeat overall about their near-term growth prospects, the degree of confidence fell to its lowest so far this year.”
Brock referred to low optimism and clients’ restraint when placing new orders, with Brexit negotiations and the election as key events affecting clients’ sentiment. He indicated that the housing sector was doing well and demand for materials remained high. The major issues for the sector would be “guarding against continuing higher input prices with another eye on the possibility of rising interest rates as well.”
UK services PMI for June
As with the other sectors, the service sector showed slow rise in activity, with new business growth at a nine-month low, job creation up to a 14-month high and business optimism dropping to the second lowest since December 2011. While there was a “slight pick-up in the pace of job creation to its fastest for 14 months in June,” service sector firms weren’t positive about their growth prospects. In a similar fashion to the other sectors discussed above, “Brexit-related risk aversion” and “heightened economic uncertainty” were the two main reasons that clients avoided spending.
There was an increase in employment, the strongest since 2016, due to pressures on operating capacity, but many companies commented on the difficulties of recruiting staff to their businesses.
In general, Brexit anxieties and uncertainty weakened business optimism, which was the weakest since December 2011.
Chief Business Economist at IHS Markit commenting on this week’s PMI survey readings said: “A slowing in services sector growth completes a triple-whammy of disappointing PMI survey readings. Although the three PMI surveys are running at levels that are historically consistent with GDP growing by around 0.4% in the second quarter, it’s clear that the economy heads into the third quarter losing momentum.” He added that the economy’s resilience was being tested due to political developments as well as rising inflation.
This week’s disappointing economic data due to Brexit uncertainty, weak consumer confidence and unstable economic conditions, are indicative of an economy which is slowing down. With Sterling remaining volatile due to the lack of clarity about the UK’s Brexit position and the government’s uncertain prospects in striking a good deal with the EU, the economy appears to be entangled with politics, and as things progress with Brexit, we should probably expect a few more surprises.