UK PMIs crash into contraction zone - ING

James Smith, Economist at ING, notes that the latest UK PMIs add to the growing body of evidence that firms have become significantly less confident about the outlook for investment and hiring, which cements our view that the Bank of England will deliver further stimulus in August.

Key Quotes

“The one-off flash UK services and composite PMI fell even more than (already low) expectations. The composite figure fell meaningfully below 50 (consistent with negative economic growth) to the lowest level since April 2009, and the MoM fall in the index was the largest in the series’ history. The sentiment of business in the services PMI was hit particularly hard, with firms reporting a particularly sharp drop in new orders. The manufacturing PMI was not quite as bad as it could have been, although the sterling weakness experience since the referendum is hitting costs (Markit noted that purchase price inflation is at a 5 year high).

Earlier in the week, the Bank of England Agents’ Summary indicated that firms were trying to maintain a “business as usual” approach, although were more uncertain about the outlook for investment. These PMIs, and indeed the Deloitte CFO survey released earlier in the week, indicate that businesses have become significantly less confident following the Brexit vote as uncertainty about the UK’s future position in Europe weighs on hiring and investment.

This helps cement our view that the Bank of England will deliver additional stimulus when they release their August Inflation Report. We expect a 25bp rate cut and an initial £50-60bn round of quantitative easing (potentially with an additional amount to follow over coming months) to help offset some of the economic impact of heightened uncertainty.”