PMIs released on Friday suggested that the long-prophesised slowdown in the UK economy post-Brexit has finally arrived, which caused the Pound Euro exchange rate to drop.
A worse-than-expected fall in the services PMI from 54.5 to 53.3 took the index down to a five-month low. The service sector is now expanding at a pace commensurate to what was seen before the referendum, when the index trended between around 52 and 54.
This has suggested that the post-referendum boost to the service sector, which pushed the index higher each month during the third quarter, with the PMI peaking at a sixteen-month high over 56 in December, may have run its course.
The key question economists are asking now is; does this merely represent a dip in activity, or the start of the slowdown forecast for this year?
‘A further slowdown in UK business activity growth in February adds to evidence that the economy has lost momentum after the impressive expansion seen at the end of last year,’ Chief Business Economist at IHS Markit Chris Williamson explains. ‘The PMI surveys are collectively signalling GDP growth of 0.4% in the first quarter.’
Quarterly growth of 0.4% would be the slowest pace seen since the economy expanded just 0.2% in the first quarter of 2016. It would also be below the average growth rate seen since the beginning of 2013.
The next set of Markit PMIs, in particular the services and composite, will give a much stronger picture of the economic health of the UK, as economists will be able to put together more accurate estimates of the first-quarter performance. Should the next services index reveal another slowdown, investors are likely to desert the Pound.
Sterling has therefore declined against the Euro on fears of worsening economic activity. However, expansion in the currency bloc is far-from steady, with the latest data showing that the strongest economies are failing to make up for weaker ones.
The Eurozone retail PMI has unexpectedly contracted this month, falling to a three-month low of 49.9 after the Italian index hit a five-month low of 45.5. This, combined with a two-month low in the French measure, more-than counteracted a two-month high for German sales.
While a strong climb in the German construction index from 52 to 54.1 has improved the economic outlook for the Eurozone’s powerhouse economy, Greek GDP figures have raised further concerns over the health of its weakest member.
Finalised growth data has been revised significantly lower than forecast, with quarter-on-quarter GDP being cut from -0.4% to -1.2% and year-on-year growth clocking in at -1.1% against predictions of 0.3%.
The Eurozone’s battle with inflation is equally a game of two halves. While overall price growth has reached the European Central Bank’s (ECB) target levels, core growth remains around half the 2% target.
Data will need to show a more consistent uptrend in the near future if the Eurozone outlook is to improve.
Until then, the negative impact from definite signs of weakness in the UK economy could be somewhat lessened by the fact the Eurozone doesn’t have a firm grip on its own recovery.
At the time of writing, the Pound Euro exchange rate was trading around 1.15.
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