July's (one-off) flash PMI showed services being hit hard by last month's Brexit vote. At a lowly 47.4, the PMI was provisionally nearly 5 points below its June reading, well short of market expectations and at its weakest level in some eighty-eight months.
Particularly ominously, new orders fell at their steepest rate in more than seven years and there was a record monthly decline in the series sub-index. Employment only decreased slightly, but this was still its first drop since December 2012 and business confidence in the year ahead slumped to its lowest mark in seven and a half years.
However, sterling weakness had only a relatively limited impact on sector input costs as wage inflation was subdued. Indeed, service sector output charge increased at the slowest rate since February.
The dramatic slide in the flash services PMI was not fully mirrored in its manufacturing counterpart (see today's calendar entry) but combined the two surveys yielded a composite output index of just 47.7. This was down from 52.4 in June and indicative of the worst performance by the UK economy in fully eighty-seven months. Fortunately, and in contrast to manufacturing, the Brexit impact on service sector inflation at least so far looks to have been limited and this will come as a relief to the BoE.
Consequently, with third quarter real GDP likely to fall around 0.4 percent if today's data are to be believed, the central bank should deliver at least a 25 basis point cut in Bank Rate at next month's MPC meeting.
The Markit/CIPS UK Services PMI covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM non-manufacturing index in the U.S. and the Markit Services PMIs elsewhere, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI services data give a detailed look at the services sector, how busy it is and where things are headed. The indexes are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.
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