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.
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.
The above article by Azad Zangana, Senior European Economist and Strategist at Schroders, was first published by Schroders on 22nd July 2016.