Trade wars and Brexit bring eurozone slowdown

PMI economic indicators show Brexit and US China trade uncertainty contributing to slowdown across eurozone with services sector underperforming and political deadlock likely to extend uncertainty.

Two workers on handsets at a shipyard
Uncertainties over both the US-China trade war and Brexit negotiations have resulted in growth across the eurozone’s private sector companies hitting its weakest level in 27 months.

PMI economic indicators show weak growth across the eurozone

Data firm Markit's composite purchasing managers' index (PMI) for the eurozone fell to 52.7 last month, down from 53.1 in October and representing the weakest growth since September 2016 in an index where 50 signals stagnation."It was in Germany where the euro area’s growth slowdown was centred, with latest data showing the weakest expansion here in nearly four years," said Markit."However, Italy remained the weakest-performing country, with activity slightly down for a second successive month. In contrast, firmer growth was seen in Ireland, France and Spain, although rates of expansion remained down on those seen earlier in the year."Meanwhile, in the UK, Markit's PMI for the service sector, which accounts for more than three-quarters of GDP, showed a decline in November to 50.4, its lowest since just after the EU referendum in the summer of 2016.

Policital uncertainties are impacting investment decisions

The index, published on Wednesday, came as a disappointment after PMIs for both the manufacturing and construction had shown unexpectedly healthy growth in November.But service sector companies reported that both business activity and incoming new work expanded only slowly last month with many companies blaming the current political confusion over Brexit leading to delays in clients’ business investment decisions.Chris Williamson, chief business economist at IHS Markit, believes overall UK growth might have slowed to just 0.1 per cent in the current quarter.“A sharp deterioration in service sector growth leaves the economy flatlining in November as Brexit concerns intensified. Measured across services, manufacturing and construction, the survey results suggest that the pace of economic growth has stalled," he said."With the exception of July 2016, when business slumped in the immediate aftermath of the EU referendum, November saw the worst performance since February 2013.“The surveys are so far consistent with 0.1 per cent GDP growth in the fourth quarter, thanks to the expansion seen back in October, but growth momentum has since been lost and risks are clearly tilted to the downside."

Service sector performance worse than expected

Duncan Brock, group director at the Chartered Institute of Procurement and Supply, commented, “Disregarding the month immediately after the UK’s vote to leave the EU in 2016, the services sector put in its worst performance for almost six years as confidence, a lack of strength in the global economy and Brexit uncertainty took its toll.“Service providers grappled with the lowest growth of new work from domestic and export markets for nearly two- and-a-half years as paused business contracts remained stuck and not even the temptation of discounted prices encouraged consumers to spend."The service sector's performance last month was described as "a nasty surprise" by Howard Archer of EY Item Club. He added, "Brexit uncertainties and concerns over global growth weighed on demand for business services."We have been expecting UK GDP growth to halve to 0.3 per cent quarter-on-quarter in the fourth quarter from 0.6 per cent in the third, but the November PMIs suggest the slowdown could be even more pronounced."

Concerns over no-deal could extend uncertainty over winter

David Smith, economist at ING, said that the fear of a no-deal Brexit was hurting the UK economy and that the damage could worsen with investment decisions postponed throughout the winter."If the government’s Brexit deal is rejected by parliament, then we’re unlikely to know for sure whether ‘no deal’ has been averted until much closer to the UK’s scheduled leave date in March - or later if article 50 has to be extended," he said."This is likely to see an increasing number of firms implement contingency plans – various surveys point to the fact that a reasonably high proportion of firms are yet to do so. At the very least, investment and hiring plans are likely to be put on hold until there is greater clarity."As we move into the critical Christmas trading period, there’s also a risk that this sentiment begins to spill over into the consumer sector. There’s already some evidence in the most recent confidence numbers that households are growing more cautious about the general economic situation, which makes for a tough few weeks for retailers and will act as a further drag on overall economic momentum."

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