UK Sees Economic Bright Spot

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A small improvement in manufacturing in the UK surprised economists, as the country looks at its economic future in the European Union.  The most recent Markit Purchasing Managers Index for services (PMI) rose to 53.5, a sharp increase from the prior month. The data stunned economists, who had expected a much weaker reading.

The data has become a key topic for debate as Britain prepares for a referendum later this month on whether it will remain in the EU. Those who support a so-called “Brexit” point to the study as further proof that the UK can maintain a strong economy without remaining a member of the EU.

Multiple Caveats

However, Markit Economics filled its report with warnings that the data is not as good as it would appear at first glance. "The stronger rise in total activity in May occurred despite new business growing at the slowest rate of the current 41-month sequence of expansion. Meanwhile, volumes of outstanding business fell for the second month running - the first back-to- back contraction in over three years,” the report said.

Markit also noted “weak inflows of new work” because of delayed contracts as businesses face “uncertainty” on the EU membership referendum.

Despite this, the study shows 51% of companies surveyed have been unaffected by the referendum, and only 28% said the referendum had a detrimental impact.

CEO of Chartered institute of Procurement and Supply, David Noble, gave mixed commentary on the data, emphasizing the “complications” of the EU referendum and its negative impact on Britain’s economy. "The EU referendum has prolonged the restraint on decision-makers with purchasers and suppliers in equal measure. Optimism was recorded at a ten- month high, though the consequences of a ‘stay’ or ‘leave’ outcome remain unclear,” he said.

Meanwhile, Markit Chief Economist, Chris Williamson, focused on several sharply negative data points in this and previous studies, arguing that it indicates a potential Brexit is exacerbating existing economic headwinds.

"Growth has collapsed in manufacturing and construction, leaving the economy dependent on the service sector to sustain the upturn, though even here the pace of expansion has remained frustratingly weak so far this year,” he said, adding that “trends in employment and order books also deteriorated further across the economy in May."

Williamson remains confident that a Brexit is unquestionably bad for Britain. "Uncertainty caused by the possibility of ‘Brexit’ has already had a detrimental impact on one-in-three companies, meaning growth could rebound in the event of a Remain win,” he said.

Several politicians, economists, and bankers have urged the British public to vote to remain in the EU, citing studies that say a vote to leave could cause the country’s GDP to fall by as much as 9%.