1. Money matters
June 5, 2018updated 06 Jun 2018 10:28am

Purchasing Managers’ Index shows Britain’s economy is waking up from its winter hibernation, but Europe is flagging

By Rachel Dobbs

The British economy seems to be waking up from its winter hibernation, according to data released today. The IHS Markit purchasing managers’ index (PMI) – an economic indicator derived from monthly surveys of companies – hit a three-month high of 54 in May for the services industry, up from 52.8 in April and significantly above the consensus prediction of 52.9. The services industry is the largest economic sector in the UK.

An indicator of good economic health, after a slow start to 2018, this might be enough reassurance for the Bank of England to go ahead with interest rate rises in order to curb inflation. A planned rate hike in May was postponed over concerns about an economic slowdown. If the Bank of England decides this is temporary and does move to increase interest rates, it will be only the second rise in a decade. The pound rose sharply against the euro and dollar as traders responded to the news.

The picture was not so rosy in Europe, however. IHS Markit’s composite PMI showed economic activity in the eurozone at an 18-month low of 54.1. While any PMI value above 50 is a positive indicator, today’s score represents a significant fall from May which is now the fourth straight month in which business activity increases slowed down in the eurozone. This suggests that the first-quarter slowdown seen in the single currency area is not just a passing headwind, as many hoped.

If the eurozone’s $10tn economy continues to cool it may have a knock-on effect in other parts of the world and the weak growth it experienced in the first three months of the year has already contributed to slowdowns in other developed economies.

Within the eurozone, today’s data shows that Italy is having a particularly difficult time. While the PMI itself actually ticked up in Italy from April to May, IHS Markit’s surveys showed that confidence among Italian service providers sank to its lowest level in almost two years. This glum outlook is reportedly a result of the country’s ongoing political instability, which is dampening the appetite of investors for Italian debt and stocks.

Chris Williamson, chief business economist at IHS Markit, said:

The pace of eurozone economic growth sank to a one-and-a-half year low in May, and has now slowed continually since January’s peak to suggest that the region is on course for its worst quarter since 2016.

He continued:

The slowdown since earlier in the year has been broad-based, though Spain has shown the greatest degree of resilience. Crisis-torn Italy has meanwhile reported the weakest expansion of the four largest euro member states for the fourth month running.

With the economic indicators turning down at the same time as political uncertainty has spiked higher, the eurozone’s outlook has darkened dramatically compared to the sunny forecast seen at the start of the year.

It is not all doom and gloom in Europe, though. Tech stocks surging to a 17-year high – helped by soaring Apple shares during its WWDC conference and Microsoft’s acquisition of GitHub yesterday – helped to steady European shares and European bourses turned positive today.