UK service sector improves, but Brexit fears weighs on the outlook - ING

James Knightley, Research Analyst at ING, notes that the UK’s service sector purchasing managers’ index has risen a fraction more than expected to stand at 53.7 in March versus 52.7 in February (consensus was 53.5).

Key Quotes

“With the manufacturing and construction PMIs remaining little changed (but at least staying in growth territory) the overall composite index has risen to 53.6 from 52.7. This is still well down on the average level of 2015 and suggests that the UK economy has lost momentum at the start of the year.

An obvious factor behind this is the upcoming referendum on the UK’s ongoing membership of the European Union. With opinion polls suggesting that the vote will be incredibly close, businesses are likely to act cautiously and not embark on any significant expansion plans until the economic outlook is clearer. This means that investment and labour hiring plans will be more limited, which is something that was also highlighted in the recent Deloitte CFO survey. As such, the economy looks set to post slower growth in 2Q16 than in 1Q16.

Should the UK vote to remain within the EU then we suggest that the slowdown will be temporary and the delayed hiring and investment plans will be re—instated, leading to a decent bounce in activity in 2H16. However, should the UK vote to leave then expansion plans are likely to be cancelled, business and consumer sentiment will take a hit and the Bank of England would likely have to step in with policy stimulus to try and shore-up confidence.”