UK Growth Holds up in the Services Sector

In May only the Italian and UK services sectors did not deteriorate. Overall EMU services edged lower and Germany’s sector weakened. The UK services sector evaluated in its historic range in terms of its own relative standing is the second strongest among this group of countries, nearly as strong as in Germany. The German index at 51.76 is lower than the UK index at 53.31. But the UK services sector has been stronger than the German sector historically so the German index is actually a bit higher relative to its historic standing even with a lower raw reading in May. Both Germany and the UK have services sectors that are much stronger than other EMU members in the table.

Still the firmness in the UK services sector should not be taken as too strong an underpinning.

First the UK service sector is one of the strongest in Europe but that does not mean it will be able to resist the weakness we see in other countries.

Second, the UK MFG PMI index has fallen quite sharply. The UK MFG sector while falling sharply still has one of the ‘better’ relative MFG readings. The UK MFG sector is the third strongest in raw terms in May but has the second strongest standing in its historic queue among countries for which we have individual readings.

Third, apart from the relative strength of this sector there are simply issues of momentum. Momentum in Europe is pointing lower. The UK MFG index while relatively strong in level terms made the sharpest monthly fall among a group of nine EMU members. The stability in the services sector is even more of a surprise with MFG unraveling so sharply.

While not a single currency member, the UK is tightly bound to Europe and to EMU. The weakness and ongoing problems there will have severe transmission effects though trade and capital flow linkages and particularly through banking sector relationships. The UK, even more than the US, has an outlook that is held hostage to the EMU situation. Currently while the UK seems to be growing a bit better than EMU - and most of its members- it is having own problem with its inflation rate. EMU does not have this constraint. So the UK has entered into a period where its central bank is having its actions somewhat more constrained by its inflation condition. While the ECB has many entanglements from its banking sector problems, it has a freer hand for monetary policy.