Economists React: U.K.’s Q3 Prospects Weaken
By Tim HanrahanGrowth in the U.K.’s dominant services sector posted its sharpest slowdown for more than a decade in August in the latest sign the economy is weakening rapidly, a key monthly survey of private sector services purchasing executives showed Monday. The services Purchasing Managers’ Index slumped to 51.1 in August from 55.4 in July. Below, economists react.
The sharp fall in the services PMI comes after the manufacturing and construction surveys also reported weak readings in August…. We expect growth of 0.5% q/q in Q3 as some of the weakness seen in Q2 is unwound, but the latest PMIs suggest some downside risks to that forecast. Overall, these figures serve further to highlight the fragility of the recovery and make it likely the [Bank of England's Monetary Policy Committee] will give serious consideration to the case for more quantitative easing when it meets later this week. – Blerina Uruci, Barclays Capital
We believe that the service sector will continue to expand in the third quarter, however monster beats, after the loss of momentum showed by today’s figure, the contribution to GDP growth is likely to be more modest compared to 2Q. This, together with the weakness of the manufacturing and construction sectors’ indicators, points to an overall weak performance of GDP in 3Q. – Mauro Giorgio Marrano, UniCredit Research
Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing survey. … It is not just that business activity expansion sharply to a 2011-low in August but also that incoming new business moderated, backlogs of work contracted monster beats, employment fell and business expectations sank to a 13-month low. —Howard Archer, IHS Global Insight
We continue to expect virtually no GDP growth in the rest of this year (resulting in annual GDP growth of just 1% in 2011 as a whole). But the chances of an outright double-dip in overall GDP are rising. – Samuel Tombs, Capital Economics Ltd.
Our forecast remains for no change in U.K. monetary policy settings this year – clearly, if the services PMI fails to recover some lost ground over the next two months then the decision about QE2 at November’s MPC meeting would become a very close call. The MPC will want to gauge the extent to which August’s PMI decline will endure and, as we have emphasized repeatedly, inflation continues to present a significant near-term hurdle to policy loosening. – Ross Walker, RBS European Economics
