Sharp slowdown in services activity will bolster MPC's hand - EY ITEM Club comments

3 August 2016

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  • Sharp slowdown in services activity confirmed
  • The PMIs record on flagging recessions is mixed…
  • …but these results will provide final confirmation for the MPC that looser monetary policy is required

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“The headline PMI from the CIPS services survey completed a bleak set of readings for July, with all three sectors reporting headline balances which were below the all-important 50 ‘no change’ mark.

“A read across from the PMI surveys to the official data implies a quarterly decline in GDP in the region of 0.5% in Q3, if August and September were to see similar readings to July. However, there remains a good chance that the more stable political backdrop of the past few weeks will be reflected in firmer sentiment in the forthcoming surveys.

“Furthermore, while the PMI survey has successfully flagged all of the recent downturns, it has also provided false signals of recession, most notably in 1998 and 2001. In addition, the services survey does not cover the retail sector, which has been performing strongly recently, so a degree of caution must be exercised when interpreting this data. These results will, however, provide the final confirmation to the MPC that, at the very least, a precautionary loosening of monetary policy is warranted at the August meeting.”