UK Services PMI Slides in July as "Brexit Uncertainty", Hot Weather and World Cup Stymy Activity

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The IHS Markit Services PMI showed activity in the UK's largest economic sector cooling during the month of July as a series of adverse events slowed the pace of activity among companies and deterred new order growth.

The all-important services PMI posted a surprise fall to 53.5 in July, down from 55.1 previously, when consensus had been for a lesser decline to 54.7.

This snapped a four month long period of recovery for the services index, which had risen from a low of 51.7 in March. The index slumped during the first quarter when services companies were impacted by a period of adverse weather.

Growth in both current activity and new work orders slowed during July, contributing much of the fall in the index, with IHS Markit citing "Brexit uncertainty" as something that held back new business growth.

The survey compiler also flagged unusually hot temperatures and the football World Cup as having disrupted operations and deterred footfall for some companies in the industry.

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

"July’s Markit/CIPS services survey suggests that the economy made a reasonable start to Q3. The headline balance fell from 55.1 to 53.5, leaving it a little below the Q2 average of 54.0. Nonetheless, the three-month average of the index is still consistent with services output growth of about 0.5% 3m/3m, a little above the 0.4% rate recorded in May," says Andrew Wishart, an economist at Capital Economics. "What’s more, the future activity index strengthened."

Markets care about the PMIs because, covering the UK's three largest sectors, they are an important indicator of momentum within the economy. Economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dictate where interest rates will go next.

"While it’s difficult to quantify the precise impact of the recent heat wave on overall business performance, some survey respondents reported that a combination of hot weather and the World Cup had weighed on consumer footfall. These short-term disruptions and a general slowdown in new business growth appear to have offset the boost to tourism-related activity from the extended dry period in July," says Tim Moore, a director at IHS Markit.

Friday's data comes hard on the heels of the July construction PMI, which showed activity within the UK's most beleaguered economnic recovering from an almost year-long slump.

The construction industry has been a drag on UK growth of late and, according to data released at the end of June, shrank by -0.8% during the first quarter.

The services data also follows the July manufacturing PMI, released Wednesday, which showed growth among the UK's industrial companies also cooling during the recent month.

Manufacturing had been a relative bright spot for the UK economy ever since the Brexit vote of June 2016, with the double digit fall in the Pound making British goods cheaper for overseas customers to buy.

"The falls in the manufacturing and services PMIs more than offset the large rise in the construction survey, dragging the all-sector PMI down from 55.0 to 53.8. But that is still consistent with 3m/3m GDP growth holding steady at 0.4% - the rate of expansion we expect to be confirmed in next week’s GDP release for Q2," says Wishart.

The outlook for the economy is clouded after GDP growth fell by half during the first quarter to just 0.2%, down from 0.4% at the end of 2017.

Data released so far suggests the economy rebounded in the second quarter, although most expect an annual expansion of only 1.5% for 2018 overall, which would be down from the 1.7% seen in 2017.

The first-quarter economic slowdown, and a steep decline in UK inflation, led the Bank of England (BoE) to abandon the idea of an interest rate rise in May.

This dented the Pound and left markets looking to the August meeting for the next possible move. The Bank of England raised its interest rates to 0.75% at 12:00 London time Thursday and hinted that further rate rises could also be in the cards.

"The Bank of England has hiked rates and the hawkish tone of the statement has taken markets slightly aback. But despite the Bank's optimistic outlook, we think policymakers will find it tricky to hike rates again before Brexit. We don't expect another rate rise before May 2019," says James Smith, a developed markets economist at ING Group.

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