UK heading for recession?
|The economic releases this week have saved the worst until last, with the latest set of data spelling clear bad news for the economy. Whilst the inflation - and to a greater extent the employment figures - were pleasing, today's release far outweighs the positives. Warning signs were already apparent yesterday with the decline in retail sales, but the severity of the drop in manufacturing and services PMIs combined with the fact that this is the first data that focuses solely on the post-referendum economy accentuates its importance.
Worst Services PMI reading since early 2009
A special flash release of UK manufacturing and services PMI designed to measure the impact of the Brexit vote has flash a strong warning sign and indicates the economy is in very real danger of falling into recession. Due to the size of the sector the services PMI garners more attention than its manufacturing counterpart, and this in particular is the most worrying part of this morning's release with the indicator dropping to 47.4 - far below the 52.3 previously and even missing the pessimistic consensus of 48.9. The manufacturing PMI at 49.1 was better than forecast but still marks a significant contraction on the 52.3 previously shown. A survey of purchasing managers is seen as a leading economic indicator as conventional wisdom suggests the respondents are at the cutting edge of business and among the fastest to react to macroeconomic developments.
Pound slides boosting FTSE
Rather unsurprisingly, the PMI releases are negative for the pound and will ratchet up the pressure on the Bank of England to provide some stimulus measure at their next meeting a week on Thursday. Sterling was trading higher on the day heading into the release but has since sharply reversed, with the GBP/USD down approximately 100 pips in the 15 minutes following the announcement. The impressive recovery seen in the FTSE 100 since the panic-selling the day after the Brexit vote can be explained in part by the weakness in the pound. Currency depreciation acts as a boon to many of the companies in the FTSE 100, with an estimated 80% of revenues being generated in currencies other than the pound. Possibly due to this, the index has caught a bid as the pound plummeted and currently trades slightly higher on the day. Vodafone leads the move up, gaining almost 5% after reporting first-quarter results that came in ahead of expectations. Berkeley currently sits at the bottom of the benchmark, with Taylor Wimpey not far behind as housebuilders continue to struggle in the new business environment outside the EU.
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