The drop in the IHS/Markit services PMI to a six-month low of 49.5 in September means that all three sector PMIs are now below the 50-mark which theoretically separates expansion from contraction, reigniting concerns that the economy is in recession. While we still think that the economy has avoided a recession in Q3, the data reinforce our view that the economy’s performance will remain well below par until Brexit is resolved.
- The drop in the IHS/Markit services PMI to a six-month low of 49.5 in September means that all three sector PMIs are now below the 50-mark which theoretically separates expansion from contraction, reigniting concerns that the economy is in recession. While we still think that the economy has avoided a recession in Q3, the data reinforce our view that the economy’s performance will remain well below par until Brexit is resolved.
- Like the construction survey already released, the services survey weakened in September. The sharp fall in the headline balance from 50.6 in August to 49.5 disappointed the consensus forecast of a fall to 50.3 (Capital Economics 50.0) and left it well below its Q2 average of 50.5.
- Even more worryingly, the breakdown revealed drops in all the balances (note that the business activity index is not a composite index, but a separate question). The future activity index fell for the fourth month in a row, taking the balance to its lowest level since the financial crisis. The employment balance dropped by 2.5 points to 48.0, a nine-year low. And the new orders index slipped from 50.7 to 49.3 – its lowest level in five months.
- As a result, the services PMI suggests that after rising by 0.1% q/q in Q2, growth in the biggest part of the economy has now all-but fizzled out. Meanwhile, despite dropping from 62.7 in August to 62.1, the input prices index is still well above its long-run average (58.0). As such, the survey revealed an uncomfortable combination of slowing growth but still-elevated near-term price pressures.
- Taken together with the construction and manufacturing surveys already released, the all-sector PMI, which fell from 49.7 to 48.8, points to a contraction in GDP of 0.1% to 0.2% q/q in Q3. (See Chart 1.)
- Admittedly, we can take some comfort from the fact that the surveys have not been a foolproof guide to the official data recently. They did not pick up the impact of Brexit preparations ahead of the 29th March Brexit deadline and will probably fail to do so again. That could add an extra 0.1ppt to quarterly GDP growth in Q3. And the PMIs exclude the recent resilience in the retail and government sectors. In addition, July’s surprisingly strong rise in GDP of 0.3% m/m suggest that the economy did at least start the quarter on a solid footing.
- The upshot is that we are sticking to our forecast that GDP rose by 0.3% q/q over Q3 as a whole. Following on from the 0.2% q/q fall in GDP in Q2 that would avert two consecutive quarters of falling GDP – the typical definition of a recession. Nonetheless, the surveys are probably giving us a reasonable steer on the underlying strength of economic activity, and the risks to our Q4 2019 and Q1 2020 GDP growth forecasts appear to be firmly to the downside.
Chart 1: IHS Markit/CIPS All-Sector PMI & GDP
Sources: IHS Markit, Refinitiv
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com