Economic data released over the past couple of days has pointed to a sharp slowdown in economic growth in the second quarter of the year. Much of this is being attributed to the uncertainty around the closely fought EU referendum.
PMI data turning downward across the board
As the charts below show Markit Purchasing Managers’ Index (PMI, a measure of private sector activity) data in manufacturing, services and construction have turned downwards in recent months with April seeing a sharp acceleration of this decline. All three indexes are now at their lowest levels since early 2013 with services at 52.3, construction at 52 and manufacturing at 49.2; any figure below 50 indicates an outright contraction. The sharp contraction in manufacturing means that this sector has lost 20,000 jobs over the past three months and whilst services and construction are still expanding, they are doing so at a much slower rate. Taken together, the data implies that the economy has ground to a crawl and is expanding at just 0.1%; in stark contrast to the moderate 0.4% expansion it recorded during the first quarter of the year.
Chris Williamson, Chief Economist at Markit, said:
The PMI surveys are collectively indicating a near stalling of economic growth, down from 0.4% in the first quarter to just 0.1% in April. Some of the slowdown may be attributable to the early timing of Easter, though April also saw an increase in the number of companies reporting that uncertainty about the EU referendum caused customers to hold back on purchases, exacerbating already-weak demand linked to global growth jitters and ongoing government spending cuts.
How much of this is down to EU referendum uncertainty?
It is seems likely that uncertainty around the EU referendum is playing a role as firms, both foreign and domestic, hold back on investment and other decisions to await the outcome of the vote. This is not necessarily a judgement either way, but somewhat natural ahead of a close run vote, particularly a binary one that may involve significant change depending on the outcome.
The looming EU referendum has had a profound effect on the [services] sector, keeping prices relatively stagnant and delaying new orders. At the other end of the supply chain, the National Living Wage has compounded cost increases, resulting in the overall rate of input price inflation hitting a 27-month high. Together, these factors have squeezed margins while fewer than half of businesses expect to grow over the next twelve months.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply
There are also a few other factors and points to consider:
- Warnings at the start of the year around global growth and the knock on impact on the UK should be kept in mind. The US economy performed poorly in the first quarter and while emerging markets have not seen a further significant downturn, worries about their performance remain.
- A botched budget earlier this year and concerns over future cuts to public spending or tax hikes could also be weighing on business decisions. As noted above concerns over the introduction of the national living wage in particular may be a factor.
- Services PMI, in particular, has been on a downward trend since a peak in January 2014. While it has reached its lowest level in some time, the April data is hardly completely out of kilter with previous data.
- Looking within the construction data the downturn seems to be driven by a slowdown in civil engineering and residential projects. This seems more likely to be related to public spending decisions or stamp duty changes. So far the largest impact of the EU referendum uncertainty has been considered to be on commercial property, but in construction terms this seems to be doing relatively well so far.
How might an economic slowdown impact the EU referendum?
The first point to make is that, even if there is a GDP slowdown in the second quarter of the year, its not clear how strongly this will be felt by people. Nevertheless, it is more likely to be felt than say shifts in equity markets or the value of sterling. Of course, this is not the first data point to point towards a slowdown in the economy, the Bank of England has issued similar warnings while other surveys, along with anecdotal investment evidence, has point to a slowdown. These indicators have also been linked to the EU referendum.
If some impact is felt, which way it would go is still not clear cut. Given his strong warnings about an economic slowdown it seems clear Chancellor George Osborne believes that fears of a worsening economy would drive people to vote for the status quo of Remain – since they might feel less wealth and less secure and would therefore become more risk averse. Maybe. But equally if things are seen as going worse it may encourage more people to feel the need to make a change or doing something to shake things up. Ultimately, the view that things aren’t going too badly in this country seems to also support the status quo so undermining this too much could back fire.
- This article originally appeared on Open Europe
