UK services PMI emphasises economic slowdown - ING

James Smith, Economist at ING, suggests that like the manufacturing PMI, the UK service sector survey came in above expectations, but remains close to multi-year lows and emphasises the fact that second quarter GDP growth is likely to be weak.

Key Quotes

“The latest Markit/CIPS Services PMI for May beat expectations, coming in at 53.5 vs 52.5 consensus and 52.3 previously. However, the PMI remains close to multi-year lows (April’s figure was the lowest since early 2013) and particularly reflects slow growth in new business volumes, which Markit suggest could be “linked to delayed contracts” prior to the EU referendum. On this subject, a special question revealed that 28% of firms report that the risk of a “potential exit” is causing a “detrimental overall impact” on current business, with a further 9% reporting a “strongly detrimental” impact.

The result was similar in the manufacturing survey and provides further evidence, on top of recent labour market and business investment data, that firms are delaying hiring/investment in response to uncertainty surrounding the result of the EU referendum.

As such, we expect growth in the second quarter to slow to between 0.2% and 0.3% QoQ, which would reflect the lowest rate of growth since 2012. Should the UK vote to remain in the EU, we expect a rebound in activity, although this could take a few months to be reflected in the data given the time lag involved in reinstating delayed investment. If this is the case and the UK dataflow picks up by the fourth quarter, we think that the Bank of England could look to hike rates in early 2017. If the UK votes to leave the EU, then the potential for a near-term dip in activity means that the BoE may choose to cut rates to support business confidence.”