The PMI (purchasing manager index) is not an economic outcome, but a forward-looking indicator of economic sentiment. Still, today’s figures* from the UK and the Euro Area are the first indication that predictions that the June 23 Brexit outcome will have serious short-run costs for Britain, but not so much for the Euro Area, are likely to be borne out.
The British composite PMI plunged to 47.7 from 52.4 in June. This is the most precipitous decline since the depth of the Great Recession. It takes the index way below the 50 mark that is calibrated to, normally, separate expansionary from contractionary phases. On face value, then, this is suggestive of a UK recession.
Compare this to the Euro Area. There was also a decline, but at 0.4 points it was of a completely different order of magnitude and the 52.9 reading still comfortably indicates expansion.
It’s a survey, and the correlation with subsequently published GDP numbers is far from perfect. It is conceivable that the Brexit shock to the PMI is a sort of mirror image of the (helpfully labelled) Olympics shock: in mid-2012 UK GDP growth jumped much higher than the modest uptick in the PMI. Maybe this time the panic indicated in the survey will translate less than one-to-one in reduced output. Indeed, I think that is likely. But I also think the UK will be fortunate if it avoids a near-term recession.
The figures are also a useful reminder of the need to keep a sense of proportion. The Euro Area has numerous problems of its own making. It is a vanity indulged in by too many British commentators and politicians that Brexit is anything more than an “also ran” in the list of issues weighing on EU/€A politicians’ minds.
(* you can access the underlying data here).