UK is awaiting indications of the economic impact of the vote to leave the EU, regular surveys of purchasing managers are being watched very closely. They are probably the most reliable early indicator, but economists say they must be interpreted carefully.
The UK purchasing managers’ index recorded its sharpest ever monthly fall in July following Britain’s vote to leave the EU. Figures for August will be published at the start of September.
The index, which measures companies’ orders, production and deliveries to provide a snapshot of corporate health, fell to a level that suggests the economy could contract 0.4 per cent in the third quarter.
But Andrew Kenningham of Capital Economics is one of many experts who think “the PMIs are overstating the impact of the vote on the UK economy”. The Bank of England’s latest growth forecast, of 0.1 per cent this quarter, assumes the PMIs will improve in the coming months.
The PMIs have a good record of predicting economic activity. They “did a much better job than initial GDP estimates of flagging up the beginning and end of the 2008 recession”, said Samuel Tombs of Pantheon Macro.
However, Ruth Gregory of Capital Economics, said: “It is clear that PMIs have overreacted in the past.” Three periods stand out: the Asian financial crisis in 1998, the terrorist attacks in New York in 2001 and the Iraq war in 2003. On all three occasions the PMI dropped to levels that signalled a recession that did not in fact happen.
Chris Williamson, chief business economist of IHS Markit, which compiles the PMIs, said the surveys may have become a victim of their own success: policymakers can take action on their gloomy predictions and prevent them from coming true. The poor result in July was enough to convince Martin Weale, a member of the BoE’s Monetary Policy Committee, that further action was required.
If the economy ultimately performs better than the PMIs suggest, this could partly reflect the boost from policy action, although it typically takes some time for policy to have an effect.
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Most economists, including Mr Williamson, expect the PMI figures for August to show some improvement. Businesses have had more time to digest the implications of the referendum result and the BoE has taken action. Other indicators, such as the Lloyds Bank Business Barometer, have regained some of the ground they lost straight after the vote.
Another reason for treating the PMI figures with caution is that they exclude the retail, energy and government sectors.


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