PMI Data Points to Brexit Slowdown

The Purchasing Managers Index (PMI) is widely regarded as a lead indicator of turning points in the macroeconomic cycle - and the latest reading does not bode well for the UK economy in the immediate aftermath of the June 2016 Brexit vote.

UK business activity in July has slumped to lowest level since April 2009 according to the latest PMI reading. Purchasing Managers are those making buying decisions for stocks of raw materials, components and final products for sale in the retail industry. A figure of 50 separates expansion from contraction, so if the PMI drops below 50 this is an indication that sectors of the economy may be falling into recession territory.

The Monetary Policy Committee at the Bank of England may use the weak PMI data along with other evidence to consider a cut in policy interest rates towards zero at their next meeting.

A drop in the PMI was more or less inevitable in the wake of the referendum result. It makes sense for businesses to be cautious given the degree of economic uncertainty at the moment. A dip in supply-chain orders suggests that firms are reluctant to commit themselves to ordering stock before they see how consumer confidence, retail sales, housing market activity and the export sectors are performing.

Unemployment fell below 5% of the labour market this week and the employment numbers look strong - but the labour market tends to be a lagging indicator of the economic cycle.