Purchasing managers’ index suggests London businesses are contracting

Businesses across England and Wales have shown signs of contraction in the wake of the vote to leave the European Referendum. The UK’s purchasing managers’ index showed contraction in every region but two in July, with London and the South East being the worst affected.

The purchasing managers’ index (PMI) is an important indicator of the economic health of the manufacturing, construction and service sectors. It is itself based on a number of indicators including new orders, inventory levels, production, supplier deliveries and employment.

The latest PMI fell from an overall score of 52.5 in June to 47.4 in July. An index score of greater than 50 indicates growth while an index score below 50 indicates contraction. The lower the number falls below 50, the faster the rate of decline is perceived to be.

London had the lowest score at 44.4, followed by the South East on 45.5. This represented the first time these two regions had registered a contraction since 2012.

As well as providing a warning sign for the economy as a whole, times of contraction can be particularly worrying for individual businesses affected. Contingency planning could help mitigate some of the worst effects but a shrinking operation is never good news for any business.

The North East was close behind London and the South East with a score of 46.0 indicating another region in contraction. The only two regions with scores that indicated growth were the East Midlands (50.9) and the East of England (51.0).

Earlier in the month Markit/CIPS, who produce the purchase managers’ index, said that its estimates pointed to the economy as a whole contracting by 0.4% in the third quarter of 2016.

The PMI is watched carefully by a number of different organisations including the Bank of England and the latest results are likely to have had an influence on the decision to cut interest rates and introduce other measures aimed at fighting inflation and a potential recession.

As well as the historic rate cut, these included a program of government and corporate bond buying and a scheme aimed at ensuring banks passed on the interest rate cut to borrowers.

By Phil Smith

If you would like to have a free no obligation chat with one of our advisers please call us on 020 7186 1144.

View all Business Insights