UK Indicators Point to Decline, Pound Suffers

A growing number of economic indicators are pointing to worsening economic conditions in the UK, causing the British pound to fall further in value.  The services Purchasing Managers’ Index fell to 52.7 in February, according to Markit Economics. The decline follows consistent weakness in services demand throughout the country, and is far below expectations of a 55.1 reading. In January, the PMI reading was called “disappointing” by Markit and several economists, although it was far above current levels at 55.6.

A growing number of economic indicators are pointing to worsening economic conditions in the UK, causing the British pound to fall further in value.  The services Purchasing Managers’ Index fell to 52.7 in February, according to Markit Economics. The decline follows consistent weakness in services demand throughout the country, and is far below expectations of a 55.1 reading. In January, the PMI reading was called “disappointing” by Markit and several economists, although it was far above current levels at 55.6.

The Eurozone has also begun to outperform the British services sector, as the monetary union’s flash PMI for February rose to 53.0, thus rising above Britain’s rate in a surprise move that indicates further spending and consumption in Europe. Some economists are surprised at the findings, as recent CPI data indicates deflation has returned to Europe, which conventional economic theory believes causes people to spend less, not more.

The reading comes after construction growth fell to a 10-month low in February, according to another study by Markit/CIPS. The group’s construction PMI fell to 54.2 in February from 55 in January, surprising analysts who had expected construction demand to remain strong in 2016 to offset rising house prices and a so-called “housing crisis” in the UK as demand outstrips supply.

Weak Growth, Soft Manufacturing

Nonetheless, CEO of Chartered Institute of Procurement and Supply, David Noble, said the construction industry is suffering from a global slowdown, while the housing sector had “the weakest growth for just over two-and-a-half years,” he said.

Noble also noted businesses are becoming increasingly pessimistic. “And, though overall growth was maintained, business confidence for the future was at its lowest since December 2014. The next few months will be critical to the understanding of whether this dampened optimism was justified and whether there are still more serious issues to be unearthed,” he said.

Manufacturing growth has also plummeted in the UK, which some economists believe could be resulting in less demand for construction as factory workers have less economic leeway to buy houses. In February, UK Manufacturing PMI fell to its lowest point in 34 months, down to 50.8. “The trend in staffing levels also registered a downward trajectory, with some job losses thrown in, and only the intermediate goods sub-sector showing signs of employing more staff,” said Noble.

Pound Pressures

Once the strongest currency in Europe, the British pound is now suffering a significant decline that many did not expect. Compared to the U.S. Dollar, the GBP is down 4.5% year-to-date even as Britain stays outside of the European Quantitative Easing programs that are expected to weaken the euro. Compared to the euro, the GBP has also lost about 4.5% year-to-date.

The pound continued to fall on the weak services PMI data, and some analysts expect further weakness to come.