Yet another marker that a double-dip looms

Services, the biggest and most important sector, is slowing.

The last of the three CIPS/Markit Purchasing Manager's Index (PMI) indices that are published every month hit the streets this morning. Each month, we get data for construction, manufacturing and services from these surveys, which are much more timely than the official data -- and they have the advantage that they don't get revised. They also have pretty good predictive power. I have already reported here on the horrid data for construction and manufacturing, so the services sector report was going to be vitally important. Not least because services are the biggest and most important sector. Needless to say, the news was appalling.

The services business activity index fell over 4 points to just above 51; its sharpest fall for a decade and the lowest level since the end of last year. The worry is that it is heading much lower into territory suggesting outright contraction. The decline in the index was greater than those seen in the autumn of 2008 (following the collapse of Lehman Brothers) and was surpassed only by the foot-and-mouth related fall of April 2001. With underlying trends in activity and new business weakening, and confidence regarding the future down, a further drop in service sector employment was recorded in August. Respondents noted the non-replacement of leavers or forced redundancies, as they engaged in restructuring or had insufficient work relative to capacity. Unemployment looks likely to rise further.

The combination of data from the three PMIs plotted in the chart makes the prospect that there will be little or no growth during the rest of the year highly likely. The declines in the three PMIs in 2007 predicted what was to come well before the official data, which didn't start to show sharp falls until well into 2008, so the concern is that these drops suggest there are bad things to come. Indeed, the prospects of a double-dip are rising fast.

Chris Williamson, chief economist at Markit, also has concerns that look right.

The PMI surveys collectively pointed to a near-stagnation of economic growth in August, signaling an increased risk that GDP growth in the third quarter could be even weaker than the 0.2 per cent rise seen in the three months to June. Forward-looking indicators also suggest that the economy could weaken further at the end of the quarter, raising the prospect of a slide back into contraction in Q4 -- if not in Q3 -- and will provide ammunition for those seeking a further injection of stimulus into the economy by the Bank of England. The all-sector PMI is at a level which has always triggered interest rate cuts in the past.

This data makes the MPC decision this week a close call: they will leave interest rates untouched as they have every month since March 2009. As a consequence of the recent round of poor data, though -- including stagnation on the jobs front in the United States and an evolving crisis in the eurozone -- the chances the MPC will move to doing more asset purchases (ie QE, at their meeting this week) has risen. These are the sort of circumstances under which a central bank pulls a surprise in order to show the markets that, in contrast to the Chancellor, they are up to the task.

If they don't act at this meeting, it is all but certain they will do so at their October meeting. Adam Posen looks to have been spot on.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Leader: Theresa May and the resurgence of the state

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years.

Theresa May entered office in more tumultuous circumstances than any other prime minister since 1945. The UK’s vote to leave the European Union was a remarkable rebuke to the political and business establishment and an outcome for which few had prepared. Mrs May recognised that the result was more than a revolt against Brussels. It reflected a deeper alienation and discontent. Britain’s inequalities of wealth and opportunity, its regional imbalances and its distrusted political class all contributed to the Remain campaign’s ­defeat. As she said in her speech in Birmingham on 11 July: “Make no mistake, the referendum was a vote to leave the European Union, but it was also a vote for serious change.”

When the financial crisis struck in 2007-2008, David Cameron, then leader of the opposition, was caught out. His optimistic, liberal Conservative vision, predicated on permanent economic growth, was ill-suited to recession and his embrace of austerity tainted his “modernising” project. From that moment, the purpose of his premiership was never clear. At times, austerity was presented as an act of pragmatic bookkeeping; at others, as a quest to shrink the state permanently.

By contrast, although Mrs May cautiously supported Remain, the Leave vote reinforced, rather than contradicted, her world-view. As long ago as March 2013, in the speech that signalled her leadership ambitions, she spoke of the need to confront “vested interests in the private sector” and embrace “a more strategic role” for the state. Mrs May has long insisted on the need to limit free movement of people within the ­European Union, and anticipated the causes of the Leave vote. The referendum result made the national reckoning that she had desired inevitable.

More than any of her recent predecessors, the Prime Minister seems willing to challenge the economic and political orthodoxies of the past 35 years. She has promised worker representation on company boards, binding shareholder votes on executive pay, improved corporate governance and stricter controls on foreign takeovers.

The shadow chancellor, John McDonnell, has set the ­Labour Party on a similar course, stating in his conference speech that the “winds of globalisation” are “blowing against the belief in the free market and in favour of intervention”. He pointedly criticised governments which did not try to save their domestic steel industries as China dumped cheap steel on to global markets.

We welcome this new mood in politics. As John Gray wrote in our “New Times” special issue last week, by reasserting the role of the state as the final guarantor of social ­cohesion, Mrs May “has broken with the neoliberal model that has ruled British politics since the 1980s”.

The Prime Minister has avoided the hyperactive style of many new leaders, but she has deviated from David Cameron’s agenda in several crucial respects. The target of a national Budget surplus by 2020 was rightly jettisoned (although Mrs May has emphasised her commitment to “living within our means”). Chancellor Philip Hammond’s Autumn Statement on 23 November will be the first test of the government’s ­fiscal boldness. Historically low borrowing costs have strengthened the pre-existing case for infrastructure investment to support growth and spread prosperity.

The greatest political ­challenge facing Mrs May is to manage the divisions within her party. She and her government must maintain adequate access to the European single market, while also gaining meaningful control of immigration. Her statist economic leanings are already being resisted by the free-market fundamentalists on her benches. Like all prime ministers, Mrs May must balance the desire for clarity with the need for unity.

“Brexit means Brexit,” she has repeatedly stated, underlining her commitment to end the UK’s 43-year European
affair. If Mrs May is to be a successful and even transformative prime minister, she must also prove that “serious change” means serious change and a determination to create a society that does not only benefit the fortunate few. 

This article first appeared in the 29 September 2016 issue of the New Statesman, May’s new Tories